what can the baltics offer in functional...outsourcing trends indicate a clear movement from a...
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What can the Baltics offer in functional expertise, efficiency and service quality versus Central and Eastern European (CEE) countries?
When it comes to selecting a location from among the CEE countries, Poland, the Czech Republic and Hungary usually come to the top of the list, which is fair considering their market sizes and maturity as investment destinations. However, the Baltic States, with their fast-paced economies, modern infrastructure and highly skilled labor force, have been unfairly sidelined by major investors for quite a long time.
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Currently, the situation is changing. With more and more investment projects choosing the Baltic States as a nearshoring destination, this location is firmly placed on the investors’ focus map. Many investors who have chosen the Baltics as their investment destination already enjoy business growth thanks to the discovery of the benefits the Baltic States can offer.
As global economic uncertainty continues, cost reduction, focus on the value added activities, effective risk and project management remain the key imperatives. Organizations are required to manage a multitude of challenges, including:
• Slow growth in mature markets• Realizing the full growth potential in emerging markets
and managing the risk of operating in these markets• The opportunities and threats of new technologies • The ever-changing and increasing burden of regulatory
compliance
Leading organizations are challenging the status quo of their risk, control and compliance operating models; they are looking at ways in which they too can contribute to cost
reduction, whilst enhancing efficiency and risk management capabilities.
The outsourcing trends today demonstrate clear movement from a regional towards a global set-up with the focus on scope expansion, improved governance, further automation and end-to-end processing. In particular, the following trends can be identified: • Size: increasing adoption by smaller scale operations• Technology: optimizing investment in ERP and global
technology• Functions: Extending the value chain with added
functional breadth• Region: Movement from local and regional to global
service organizations• Make or Buy: Dedicated selected sourcing based on value
contribution
The goal is to create service organizations that can compete with the best the markets have to offer in functional expertise, efficiency and service quality, whether in finance, information technology, human resources or other service areas.
Global outsourcing trends
Outsourcing trends indicate a clear movement from a regional towards a global set-up with a focus on scope expansion, improved governance, further automation and end-to-end processing.
Given this fact, we have tried to benchmark the Baltic States with the other major Central and East European (CEE) countries in order to provide comparative insights, which will be useful for our clients in their successful transfer of the shared service model to the right location.
Size
Technology
Functions
Region
Make or buy
Time 1990 1995 2000 2005 2010 2015 Trends
> €6.5 bn revenue,>250 seats > €1.3 bn revenue,>75 seats
Global communications Self Service Applications
ERP standardization Enabling technology Global Workflows
Finance and general admin Expand finance
IT HR Purchasing
Regional
SSC & BPO mixOutsourcing other functions
Local Global
IT outsourcing (Operations) Business Process Outsourcing CPO
Captive Shared Services Operations
Increasing adoption by smaller scale operations
Optimizing investment in ERP and global technology
Extending up value chain adding functional breadth
Movement from local and regional to global service organizations
Dedicated selected sourcing based on value contribution
The Baltic States are offering a stable growth platform for Nordic, UK, US and German investments.
Wind of Change
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Business case for the Baltics
Service Centers
• Banking and Insurance• Financial Analytics• Legal Process Outsourcing
Life Sciences
• Biosimilars• Industrial Biotech
Electronics and electrical engineering
• Oil and Gas• Medical Devices• Lasers
Mechanical Engineering
• Oil and Gas• Agriculture / Heavy equipment• MRO
IT
• Emerging Product Companies• Data Centers
Key focus sectors and segments in the Baltics for investors
SSC in the Baltics vs CEE
Estonia Latvia Lithuania Poland Czech Republic Romania Bulgaria
Population 1.3m 2m 2.9m 38.5m 10.5m 21m 7.3m
# of centers 75 36 52 >470 >200 >80 >45
# of employees 6,000 5,000 11,000 130,000 55,000 45,000 >22,000
# of employees (% of the labor force)
0.5% 0.3% 0.4% 0.3% 0.5% 0.2% 0.3%
Main Service center/BPO location(s)
Tallinn Riga Vilnius Krakow, Warsaw, Wroclaw, Katowice, Lodz, Poznan
Prague, Brno, Ostrava
Bucharest, Cluj, Napoca, Timisoara
Sofia
Key functional coverage
RigaFinance, IT, HR
Finance& Accounting, HR
BIFS, Finance& Accounting IT
Knowledge Process Outsourcing, IT
Customer support, technical support, Market research, Finance & Accounting
Customer services, Back office transactions, IT
LIAA, Enterprise Estonia, Invest Lithuania, etc.
The table above indicates that despite the rapid growth, the Baltic SSC sector is still not fully saturated and has a significant growth potential compared to the peers in CEE.
An integral part of the safe Nordic-Baltic business harbour
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1 Eurostat, 20132 The 2014 A.T. Kearney Global Services Location Index™3 Eurostat, 2013
More than 20% of the population speak 3 foreign languages³
Top 25 rank worldwide as the best destinations for providing outsourcing activities²
More than 40% students graduating from social science, business and law¹
Key facts about the Baltics:
Cost competitivenessThe Baltic States offer a strong cost competitive position to all investments compared to CEE peers.
Key facts about the Baltics:
0% profit tax incentives in Free Economic Zones and other special incentives for foreign investment3
One of the fastest productivity growth rates in the EU 2005-20131
5 times lower labor cost compared to UK, Germany and Scandinavian countries1
Ranked Top 15 in terms of pay and productivity rank worldwide2
1 Various publicly available sources, 20152 Eurostat, 20133 The 2014 A.T. Kearney Global Services Location Index™4 Eurostat, 2013
Cost effective human capital offering wide efficiency gains
5
0
10
20
30
40
50
60
4 5 6 68 9 10
21
31 31
3840
49
Norway
Sweden
Denmark
Finland
Germany
United Kingdom
Czech
Republic
Estonia
PolandLatvia
Lithuania
Romania
Bulgaria
Labor cost per hour, EUR
Eurostat 2013
Profitability growth 2013 vs 2005
The most attractive countries in terms of labor cost are Bulgaria, Romania, Lithuania and Latvia. Compared to mature markets (UK, Germany, Finland, Denmark, Sweden and Norway), the difference in labor costs per hour is 5 times lower.
-10% 0% 10% 20% 30% 40% 50%
42%
38%
26%
24%
23%
22%
12%
7%
7%
4%
3%
1%
-5Norway
United Kingdom
Finland
Denmark
Sweden
Germany
Czech Republic
Romania
Bulgaria
Estonia
Poland
Lithuania
Latvia
Eurostat 2014The labor productivity = GDP/ETO withGDP = Gross domestic product, chain-linked volumes reference year 2013ETO = Total employment, all industries, in persons
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According to GCI, Estonia, Lithuania and Latvia have the best rank in terms of pay and productivity.
LLRI carried out an analysis of labor relations’ flexibility. The results show that the best ranked country is Bulgaria. The Czech Republic, Poland, Estonia, Romania and Latvia are very close, while Lithuania is the least flexible country in terms of labor relations.
Labor relations flexibility rank
0
30
60
90
120
150
11
7484 86
93 94
127
LithuaniaLatviaRomaniaEstoniaPolandCzech Republic
Bulgaria
LLRI 2012
0
1
2
3
4
54.9 4.8 4.8 4.7 4.6
4.34.1 4.1 4.0 4.0 3.9 3.8 3.7
Norway
Sweden
Finland
Romania
Denmark
Bulgaria
Poland
Germany
Czech
Republic
United Kingdom
Latvia
Lithuania
Estonia
Pay and productivity GCI rank (1-7 best)
Global Competitive Index 2015
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Wide talent pool As young and vibrant nations, the Baltics States are known for efficiency, creativity, hard work and wide skill set.
Over the last 20 years the Baltics have heavily invested in people, creating a strong talent pool.
Baltic States vs CEE countries
Share of population aged 15-64 with upper secondary, post-secondary non-tertiary or tertiary education
Key facts about the Baltics:
1 Eurostat, 2013
of population aged 15-64 has upper secondary, post-secondary non-tertiary or tertiary education1
80%+
share of the population aged 25-64 speaks at least one foreign language1
90%+
3m+
labor pool1
40%+
share of the population speaks English as a second language1
Multi-skilled, energetic and creative people offering out-of-the-box solutions in product and service development
0
20
40
60
80
100
87% 86% 84% 84% 83%
72%
RomaniaLatviaPolandEstoniaLithuaniaCzech Republic
Eurostat 2013
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Estonia, Latvia and Lithuania are the leading CEE countries by the percentage of population speaking English as well as at least 2 foreign languages.
Modern ICT and infrastructureThe Baltic States offer the most up-to-date ICT technologies with full functionality in the entire region.
Latvia is 6th globally for measured internet connection speed3
Estoniahosts NATO's Cyber Defense Center of Excellence2
TOP 5 in CEE for quality of transport and railroad infrastructure1
Lithuania is leading in the EU and top 7th globally by broadband speed4
Key facts about the Baltics:
1 IMB Competitiveness report, 20142 Invest Estonia3 Akamai’s state of the internet report, 20144 Ookla Net Index, 2014
Modern and efficient infrastructure to boost business needs
Share of population that speaks 2 foreign languages and speaks English as a foreign language
0%
10%
20%
30%
40%
50%
60%
46
38
50
27
3331
25
5452 52
22 22 2219
BulgariaRomaniaPolandCzech RepublicEstoniaLithuaniaLatvia
Speak at least two foreign languages Speak English as a foreign language
Eurostat 2012
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0 20 40 60 80 100 120
17
23
24
30
32
3637
3844
4851
54
65
6875
91
107Bosnia and HerzegovinaSerbia
KosovoAlbaniaCroatia
HungarySloveniaRomania
Czech RepublicBulgaria
Slovak RepublicMontenegro
PolandMacedonia, FYR
LithuaniaLatvia
Estonia
Business-friendly environment
Top 3 CEE countries by Ease of Doing Business Rank, WBG 2014
Ease of Doing Business Rank
The Baltics are the leading CEE countries in the Ease of Doing Business ranking.
Membership in EU, NATO, WTO and Schengen zone.
Tax treaties with major markets including China, Russia and the USA.
Financial support for foreign direct investments including grants from the European Union Structural Funds.
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Availability of R&D centers When you think of major technology hubs across the globe, the Baltic States is not an obvious place that comes to mind. But this seems to be changing, with the Baltic States becoming a vibrant and growing technology scene, which has been bubbling under the surface for some time. Given this fact, research and development capabilities play a crucial role in selecting the right location where high value added services and products could be created.
It is worth mentioning that the total R&D personnel, as a percentage of the economically active population in the Baltics, is slightly higher than in Bulgaria and Romania, but is still lagging behind the Czech Republic. R&D spending in
R&D personnel (% of total labor force)
Geo\time 2010 2011 2012 2013Czech Republic 0.99 1.07 1.15 1.17
Estonia 0.77 0.83 0.86 0.86
Lithuania 0.81 0.75 0.71 0.76
Poland 0.48 0.49 0.52 0.54
Latvia 0.53 0.53 0.54 0.53
Bulgaria 0.49 0.51 0.5 0.52
Romania 0.26 0.3 0.31 0.34
Eurostat 2015
Estonia has increased considerably in recent years reaching 2.2% of GDP in 2012. This increase may well result in improved productivity and competitiveness in the future (Andrews and Westmore, 2014).
To boost innovations and R&D, the Baltics have significantly increased government support for start-up initiatives. Latvia’s startup scene is smaller by comparison, but expanding quickly, with rapidly growing numbers of new entrepreneurs joining its ecosystem. As an up and coming tech hub for entrepreneurs with big ideas, the Baltics have plans for the future and an eye on the global marketplace.
Skills and technology ready to serve most demanding R&D needs
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Competitive position of the Baltics in education and R&D field
Estonia Latvia Lithuania
Rank 34th
worldwide university-industry collaboration64th
worldwide university-industry collaboration27th
worldwide university-industry collaboration
Universities 3 universities; 9 specialized universities; 8 private education institutions
6 universities; 22 colleges 23 universities; 24 colleges
Incentives No expenditure-based R&D tax incentives Triple tax deduction for R&D1
Competencies 12 research CoEs:
• Computer Science High-Technology Materials for Sustainable Development
• Integrated Electronic Systems and Biomedical Engineering
• Chemical Biology Translational Medicine• Genomics, etc.
6 research CoEs:
• ICT• Biomedicine• Pharmaceuticals• Material Science• Magneto-hydrodynamics, liquid metals
technologies• Wood chemistry
5 Integrated science, study and business Valleys:
• ICT and Life Sciences• Sustainable Pharmacy• Physical and Technological Sciences• Agricultural Sciences• Marine Sciences and Technologies
1 Finance Estonia, Investment and Development Agency of Latvia, Invest Lithuania
Strategic location
1 Day 2 Days 3 Days 4 Days
Baltic Sea region population
110 m
CIS population
250 m
WE population
240 m
Mar
kets
Enterprise Estonia, Investment and Development Agency of Latvia, Invest Lithuania
Truck delivery times
Location, location, location
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Key facts about the Baltics:
1 Finance Estonia, Investment and Development Agency of Latvia, Invest Lithuania
4 days to reach WE and CIS countries by road transport1
600 m potential market size servicing three major markets: WE, Baltic Sea region and CIS1
Shuttle cargo railway services to WE, CIS and Asia
7 ice-free seaports
One of the competitive advantages for the Baltics is location and air traffic intensity. It is possible to fly directly to 83 destinations from Riga, 65 from Vilnius, 32 from Tallinn.
The number of passengers per inhabitant in the Baltics, especially Latvia, is significantly ahead compared to Bulgaria, Poland or Romania. Riga International Airport is one of the key
Air traffic passengers
Geo\time (1000)
Passengers per inhabitant
Number of direct flights
Latvia 4,755 2.3 83 (Riga)
Estonia 2,202 1.7 32 (Tallinn)
Lithuania 3,167 1.1 65 (Vilnius)
Czech Republic 11,742 1.1 130 (Vaclav Havel Prague Airport)
Bulgaria 6,819 0.9 50 (Sofia Airport)
Poland 21,791 0.6 85 (Warsaw Chopin Airport)
Romania 9,674 0.5 n/a
Eurostat 2014
success factors in attracting investors to the Baltics. In 2014 it was the biggest Baltics air traffic hub – 46% of the region’s passenger traffic goes through Riga. The Air Transport Research Society (ATRS) has made a comparison of the financial data of 200 airports and has selected Riga Airport as the most competitive airport in Europe in terms of costs and tariff structure per passenger.
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Large-scale international cultural events, high-class restaurants, museums and exhibits, ecotourism and well-developed recreation facilities, world-class health infrastructure, fast-growing expat community and thriving natural environment play major roles when selecting the right location.
Quality of life
Global Competitiveness Index
Geo\time GCI 2014-2015 (out of 144)
GCI 2013-2014 (out of 148)
Czech Republic 29 32 +3
Estonia 37 46 +9
Lithuania 41 48 +7
Poland 42 52 +10
Latvia 43 42 -1
Bulgaria 54 57 +3
Romania 59 76 +17
Key facts about the Baltics:
International schools and universities available²
Tallinn, Riga and Vilnius ranked in the Top 7 in terms of air quality in Europe¹
Cost of living is 2 times lower compared to the UK, Germany and Scandinavian countries³
2-3 hour flights to major European cities and Moscow
1 Green city index, 20142 Finance Estonia, Investment and Development Agency of Latvia, Invest Lithuania3 Eurostat, 2013
Rich cultural heritage, beautiful landscapes coupled with the modern world beats
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According to the Global Competitiveness Index 2014-2015 published by the World Economic Forum, Estonia holds the 29th, Lithuania the 41st and Latvia the 42nd position among 144 analyzed world developing economies, all 3 showing significant growth in the ranking compared to the previous period 2013-2014.
03 06 09 0 120 150
Estonia
Czech Republic
Lithuania
Poland
Latvia
Romania
BulgariaQuality of Life Index
According to the study Quality of Life Index, Estonia ranked the 21st world’s best country to live in, which outruns countries like France and Spain. According to this study, all the Baltic States have high scores in the safety and health care indexes. Moreover, according to OECD Better life index, Estonia ranks above the average in education and skills, environmental quality and work-life balance.
The Baltic States are valued among investors as a region with rich cultural heritage, a popular travel destination with broad spectrum of cultural offerings, thriving natural environment, world-class health infrastructure and growing and innovative economies.
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Key facts about EY Baltics:
A member of the EY global network with cross-service and cross-border teams
More than 500 well educated experienced professionals in the Baltics
1st overall market position
Deep industry knowledge, expertise and contacts in public and private sectors
20+ years presence on the market“Single-point-of-service” and account-centric approach in any of the Baltics
Multidisciplinary professional services• Audit, assurance and fraud risk investigation• Tax and legal• Accounting outsourcing• Compliance and reporting• Transaction advisory • Business advisory
Specialization by industries:
• Banking and Insurance• Technology• Telecommunications• Life sciences• Manufacturing• Transportation• Governmental• Energy
EY has an experienced multidisciplinary team with global coverage to assist our customers in all the phases of shared service programs. We will help not only with process, technology, change and project management but also with tax, site selection and internal control implications of the shared services strategy.
Moreover, our global coverage ensures that we have people with the right local skills and experience for multi-country implementations. EY in the Baltics has more than 20-years presence in the market and employs more than 500 experienced professionals.
EY in the Baltic States
A market leading professional services organisation
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Vaida Lapinskiene
Global Compliance and Reporting Services LeaderTel.: + 370 5 274 [email protected]
Linas Dicpetris
Advisory Services LeaderTel.: +370 5 274 2200 [email protected]
EY | Assurance | Tax | Transactions | Advisory
About EY
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© 2015 Ernst & Young Baltic UABAll Rights Reserved.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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