Location strategy and challenges for the BSS sector in 2021.

Last year was a difficult and demanding time for many companies but actually turned out to be not too bad for the BSS sector. Most centers quickly and successfully switched to remote work. They also took on additional tasks from the front-line operations of the businesses they serve. Of course, like other corporate functions, business services faced recruitment freezes and had to stall capital outlays. All-illustrative: according to Moody’s Orbis data, last year saw job creation by the BSS sector globally decrease by fifty percent versus 2019. Mind you that still makes 2020 roughly comparable to 2016 in terms of new jobs volume. Interestingly, CEE seems to have withered the storm more resiliently than other global regions. Job creation was down, but less so than elsewhere.

For 2021 the challenges will all be relating to acceleration. The success of their centers quickly switching to remote will lead many companies to demand more from their BSS organizations. Center leads will need to move quickly to cope. Implementing automation will need to move faster as well. This hinges on the ability to find skilled talent as much as it does on centers’ ability to help the frontline business standardize and harmonize input. Then there is the increased demand for business intelligence. Corporate leaders demand more and deeper insights as they cast business-critical decisions, and where else to turn to but to the BSS? The challenge I see here is an increased war-for-talent for such skills as data engineers and data scientists.

Another crucial issue for the BSS sector  is location strategy. It is about balancing corporate drivers and operating models against “externalities” such as talent pool and cost structures. In a fast-paced, very competitive environment you ideally would like to have the option to adjust that balance quickly to cope with change. Yet this is impossible when it comes to corporate footprints. This means that companies must chose locations that can grow with them. There are a couple of factors that complicate such decisions. Firstly, many companies do not have full insight on their options – be it in terms of operating models or of locations. Secondly, there is a significant amount of “white noise” fogging location strategy. Think of the more promotional messaging by countries and cities that aim to attract business. Or of company-subjective views on this or that location. Thirdly, few companies tend to have the time or resources to develop a robust location strategy. This leads to the risk of hastened decisions. Or of simply copying the choices that other companies have made. Since every company and every location project is different, a “follow-the-lemmings” approach rarely succeeds.

The pandemic has undoubtedly changed the attractiveness of certain locations, but it is probably more about additional locations becoming attractive than it is about some locations losing appeal. What we have seen, globally and across CEE, is increased corporate attention for setting-up business services in so-called Tier-3 and Tier-4 cities. BSS leaders do so for multiple reasons. Increasing resilience and improving business continuity plans clearly is one of them. But there also is the trend of centers moving their more transactional processes out of bespoke Tier-1 locations. This to capture wage cost arbitrage and to tap hitherto less used talent pools.

What is worth mentioning in the context of location strategy is that the Covid-19 pandemic has moved discussion regarding corporate reshoring to the centre stage of public attention across CEE. But long before the pandemic struck, companies large and small were already reorganising their global supply chains. For many this included reshoring part of their production. They were driven by such developments as offshore wage escalations and fluctuating costs of goods sold, weak far-shore intellectual property and technology protection, trade wars and tariff increases, the supply-chain impacts of a “hard” Brexit, shifting demographics and markets, trends towards customised, next-day delivery, and evolving societal pressure for sustainability. But note that reshoring is easier said than done.

One common misconception is that reshoring is about manufacturing returning to its country of origin. It is not. Reshoring in most cases is about nearshoring. It is about companies locating operations closer to market. And about product localisation instead of globalisation. Another frequent mistake is that people assume companies can simply “pick-up-their-bag” and move. This rarely is the case.

The reshoring equation is potentially more difficult to solve than the mere quest for low-cost labour that drove companies to locate production in Asia through the last three decades. Certainly, labour costs will continue to be important in reshoring decisions going forward. But today’s focus is more on total cost (the combination of wages, raw materials, in and outbound shipment, tariffs, and so on).

But costs aside, companies will typically consider over 60 criteria to weigh their reshoring options. Some of the key ones include: availability of digital/automation skills; ability to source experienced talent; speed and ease of market access.

Probably all-illustrative of the outlook for CEE is finding by the Vienna Institute for International Economic Studies. While noting that post Covid-19 companies would not be as keen to far shore, and speaking to the ensuing opportunity for emerging Europe, it stated: “This will not happen next year, or perhaps the year after. But over the next decade we are likely to see a shift”.