Cheap deals of today – Are they really a bargain of tomorrow?

August 5, 2009

Shared service centers in Prague, Budapest, Lodz, Poznan, Warsaw, Wroclaw, Krakow… The prospects were promising, the objectives were ambitious and the plans seemed to be realistic. But a few things have not been taken into consideration…

Promising prospects – how has the story begun?

It started in the beginning of 2000s – that time many companies from Western Europe and USA have decided to bundle their operations in form of shared services in the region of Central and Eastern Europe (CEE).

Siemens established their SSC Global Shared Services in Prague in 2003. Then in 2004 DHL opened their DHL IT Services – also in Prague. Czech Republic has also attracted shared service operations of Lufthansa,
Johnson & Johnson, SAP and many other companies.

Good language skills and professional (mainly: in the area of accounting) qualifications of the Poles are also used by global corporations, which have established their shared service centers in Krakow, Lodz, Poznan, Warsaw, Wroclaw. Poland has attracted shared services of KPMG, Accenture, Capgemini, Citibank, GE, IBM, Lufthansa, Philips and many more multinationals.

Also Hungary has been one of the most attractive locations of SSC and BPO operations.


Cost structure: Perspective of today and tomorrow

Many problems have occurred in the meantime, especially regarding the cost structure.

Let’s have a look at the development of labour costs in different European countries in the past years.

Diagram 1. Development of labour costs (year 2000 = 100)
Diagram 1. Development of labour costs (year 2000=100)
Source: Eurostat online, Germany Trade & Invest

The diagram above makes clear that the cheap countries of today are very likely the expensive ones of tomorrow. That is the first problem. And the second problem is the availability of workforce: well-qualified staff is hard to get in the popular SSC and BPO locations in Czech Republic, Hungary and Poland. The next issue is employee fluctuation – companies have to compete with each other for potential employees. And finally, rental costs show a huge dynamics as well, causing that the overall business costs sometimes achieve the level of the countries where the operations have been brought from with the objective to improve the cost structure.

Case study SAP

SAP has been present in Czech Republic since 1992 with consulting and development services offered to around 500 major companies, financial institutions and government organizations in this country.

SAP met their decision about establishing of a shared service center in Prague in 2004. The new subsidiary named SAP Business Services Center Europe (BSCE) was opened in September 2005, providing HR and finance and administration services to SAP subsidiaries located in the Europe, Middle East and Africa (EMEA) region. The forecast said about future staff amounting to 300 people supporting 70 countries in 15 different languages.

What happened then? One of SAP managers has described the situation as follows: “The expectation to find in Prague professionals who speak 4 languages offering them low salaries was rather excessive. At the end we have to do with graduates who can get many other jobs in Prague.”[1] The unemployment rate in Prague is around 3 percent which makes it quite difficult to find suitable qualified professionals.

Consequences?: In the first months many employees from Germany had to come to Prague to give support – there were many more than originally planned. There are still some Germans staying in the Prague location. Also the employee turnover is a big problem experienced by SAP shared service center as the name of SAP gives the opportunity to many people to make a great leap forward in their career: they work for a few months at BSCE and then change their job.[2] Also other companies, as the shared service center of Siemens located in CEE region, experience similar problems to those described.

But the staff issue and the investments made are not the only problem area SAP has to struggle with. The corporation wanted to use this opportunity also for marketing of their products showing that their software can successfully support outsourced (or: insourced) functions to other geographical locations.

The dream of low wages and salaries (connected with marketing campaign) can be expensive, can’t it?

Magdalena Szarafin


4 Responses to “Cheap deals of today – Are they really a bargain of tomorrow?”

  1. Demand & Supply on August 6th, 2009 11:15 am

    The salary for the skilled professionals highly depend on the typical “Demand and Supply”. If this is true then both China and India will benefit from companies setting up shared service centers. Even if the cost goes up in these countries it is still less compared to developed countries.

  2. That can be the end of outsourcing… | Outsource Portfolio on August 9th, 2009 7:31 pm

    […] corporations try to implement an alternative for outsourcing in form of shared services, using the advantages which outsourcing offers and not losing control at once. However, for many […]

  3. Research-based pharmaceutical companies having a… headache | Outsource Portfolio on August 14th, 2009 7:57 am

    […] can be used for financing of different undertakings, as drug discovery for instance. But pharma outsourcing is not just about cost sharing – it is about risk sharing as well: If new medicine fails, this failure can be shared with the […]

  4. Alens. s on April 30th, 2010 1:17 am

    The amount of cost economies is the total cost flexibility when these factors are taken into consideration. The measure of level economies, computed using the total cost elasticity independent of other factors that can affect total cost, is a component of the measure of cost economies.It is analyzed how externalizes, community go odds, fixed inputs, guideline, and other factors can affect production cost, productivity growth and its components, and also how to regulate the measures of output growth and its mechanism from the production and cost function perspectives to account for these various factors

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