RELOCATION - Pairing sites and global ambition

For locals, buying a Big Mac in Moscow might take a bigger bite out of the average pay packet than consuming the same burger in the Big Apple. But the goods are basically the same. McDonald’s makes no apology for this one-world view. The US giant may present itself with a clown’s face, but it’s trademark uniformity brings serious success. It is also a key characteristic of today’s global company.

Globalisation is the inevitable result of market competition. Multinationals with a range of goods adapting to local market tastes are less cost-effective.

The ultimate global organisation can take and make its products anywhere in the world. It operates through streamlined research, production and administration centres and earns the result that management and shareholders like best – efficiency gains and cost savings.

To achieve the structure a global organisation needs, location and corporate asset decision-making has to be done on a transnational level. “You have global portfolios of productive assets, including real estate,” says Christopher Jolliffe, partner in research and consulting services with Jones Lang Wootton. Real estate assets can amount to 30% of a company’s fixed assets, and ignoring high-tech intensive processes, real estate is the second highest revenue cost item after staff salaries. Well managed, they can optimise efficiency. Get it wrong, and they drain profits.

One of the by-products of the global trend is an intensification of specialisation across Europe. Jolliffe explains: “Companies are looking to consolidate their operations into those areas where they can get competitive strength, suitable market positioning, easy access to markets and access to inputs, whether labour, intelligence, R&D, or raw materials.” London, for example, has continued to raise its profile as a centre for professional and financial services.

“Financial services players have voted with their feet,” Jolliffe says.

“They have identified the incredibly strong critical mass that London has, the global status offered in finance and professional services, and have willingly moved increasing concentrations of activity to London.”

Jolliffe sees other trends emerging in other European locations. For example, Brussels as a centre for administrative services, Lyon and Munich for high-value manufacturing and R&D. Companies are “trying to grab hold of economies of agglomeration” says Jolliffe. “There is a strong tradition of R&D in those areas which itself has spawned an infrastructure of academic networks, and commercial R&D operations that support that kind of activity.” Once you have a critical mass of related functions they feed off each other, attracting more related inputs.

The trend towards streamlining functions on a pan-European or pan-American basis is widely acknowledged. “Companies are breaking themselves down by function and clustering in that way,” says Sue Eddowes, location consultant with KPMG. A global company might set up a centralised finance function for Europe, with another for the US. The same could be done for marketing, human resources or customer support services. “It’s not just a question of, ‘where should I be geographically?’, but ‘how should I configure my business?’,” she says. “It’s about looking at the company’s whole operation rather than discrete parts.”

Centralised functions, or shared service centres, have been pioneered by US corporations, though Ernst & Young management consultants expect European and Asian companies to follow suit. Shared service centres account for around 30-40% of the firm’s location studies. “The predominant pressure is the need to reduce the cost base, and specifically back office costs,” says David Powell, consultant in E&Y’s finance and administration restructuring team. Sectors experiencing particular strain on margins, such as the credit card or personal computer industries, are under extra pressure to cut costs. Establishing a shared service centre should lead to an average cost saving of 25-50%. “You eliminate a lot of duplication,” says Powell.

“You get economies of scale. You don’t need so many supervisors.” Set-up costs should be paid back within two to three years. “It’s a good investment,” he says. David Rees, director of economics at E&Y, agrees. “I have seen a #5m a year saving,” he says. “Though I can’t say how typical that is.”

With such savings in the air, speed of set-up is one factor to consider in choosing where to put the centre. But the final location decision is a complex one. “There are cost factors and tax issues,” says E&Y’s Rees.

“The availability of labour is very important and whether you require foreign language capabilities. Parts of the UK may be appropriate for a UK call centre, but not for an international call centre. You only get an aggregation of people speaking foreign languages in certain numbers of cities.” State of the art telecommunications are essential.

Particular functions clearly have particular geographical requirements, such as distribution, one of the operation sectors subjected to the clustering phenomenon. “The trend is towards two or three distribution centres with satellites,” says Julian Pinner, a director of DTZ corporate real estate services, itself set up to service clients on a pan-European basis. Typically, one distribution centre might be situated in the UK, with another servicing Western Europe from Lyon, with another in Vienna to handle Eastern Europe.

But for administrative shared service centres, Ireland, the UK and the Netherlands have emerged as the most popular locations. “Each country has its advantages,” says Pinner. “Dublin has a 10% corporate tax rate and a good availability of language speakers.”

US white goods manufacturer Whirlpool opened up a shared service centre in Dublin in October 1995. The centre handles finance functions for the company’s operations in thirteen countries across Europe including accounts payable, fixed asset registers, inter-company accounts and inventory ledgers.

“Whirlpool was looking for a best fit finance operation that would support its business into the next millennium,” says David O’Sullivan, director of the Dublin centre. Reducing the cost base, while boosting quality and efficiency, was a key aim. According to O’Sullivan, the centre has achieved its targets, including a “significant cost saving”. But he stresses: “We didn’t close anywhere else. We were looking for the kind of efficiency you get from centralising your processing. What would have been done in 13 countries is now done under one roof.”

Dublin came out ahead of other European locations by offering a low-cost but highly skilled workforce. The speed and ease of setting up the operation was also a key factor. “In May 1995 we announced our decision,” recalls O’Sullivan. “We found the building in July, got the keys in August and two weeks later were ready to take in our first 40 people.”

Earlier this year Rubbermaid, the US manufacturer best known for its kitchenware, bathware and storage products, announced it too would be setting up a shared services centre in Dublin, providing transaction processing and financial services for all its European business. Eaton Corporation, the global manufacturer of highly engineered products such as truck transmissions, is in the process of setting up a shared service centre in Glasgow to provide financial services to the group’s manufacturing, administrative and sales facilities throughout Europe. When fully operational, the site will employ around 100 professional staff.

Last year the US group decided to re-engineer both its North American and European finance functions, implementing standardised financial processes and common financial systems, and consolidating transaction processing.

Initial estimates put the total expected savings from the shared service centres in the US and Europe at $40m a year. Eaton said Glasgow won the European centre due to its growing reputation as a financial services centre, its skilled, multilingual workforce, and local quality of life.

One particular manifestation of the shared service centre, the pan-European call centre, is also a source of keen competition between Dublin, Glasgow and the Netherlands in particular. These call centres require high-quality telecommunications systems and plenty of linguists in the labour pool, but big money is at stake. Delta Airlines’ plan to consolidate 12 European reservation centres into a single call centre in West London required a #20m investment.

Wales has tended to do better at bringing in manufacturing investment.

“About 32% of people in Wales work in manufacturing,” says Godfrey Jillings, director of the Welsh Development Agency’s London office. “That’s higher than in the rest of the UK.”

But the WDA recognises the increasing importance of clerical and commercial employment and has stepped up its efforts to attract call centres. The reward has been significant successes such as Dun & Bradstreet and Admiral Insurance, which opened a call centre in Cardiff four years ago with a staff of 12 that has now reached 650, with a second office in Swansea.

Turning on the sales charm, Jillings points out that not only is Wales a low-cost region, it is also accessible from London, and has “a low female activity rate compared with south east England”. Finding staff is no problem, and once you have them their turnover rates are low. “Forget that it’s a nice place to live,” says Jillings. “In sheer business logic it’s a very good place to be.” Added incentives in the form of grants have brought in the likes of Legal & General which set up a new telemarketing centre in Cardiff in September last year.

Regional agencies battle hard to win investment. “We go about it in a very systematic way,” says Michael Roberts, director of the London Office of the Industrial Development Board for Northern Ireland. “We target business in growth phases. We endeavour to understand market needs.” For its UK marketing drive, the IDB focuses on just two sectors – service and call centres, and software. When scouting for global investment the board adds three other sectors – automotive components, electronics, and health technology.

“These fit with what Northern Ireland has to offer. They reflect our own traditional skills and they are also growth areas,” says Roberts.

Part of the challenge facing agencies is to differentiate themselves from the opposition. A spokeswoman for the London First Centre, the inward investment agency for Greater London, believes London’s creativity will keep it in a powerful position in the location stakes. “In these days of globalisation, what will distinguish locations is their scope for innovation and creativity. You see that in London.” The creativity tag can be attached not only to traditional artistic activities, such as the media or design, but to the development of new financial products and services.

Jolliffe believes agencies are becoming more commercial in their approach.

“They have to speak the language of loose capital and demonstrate a strong business case for locating in a particular city or region,” he says. One good example is the Northern Development Company which has set up a team to focus on cluster development, recognising the investment momentum that comes from building critical mass in particular industries such as chemicals, plastics and electronics.

Speaking at a conference on globalisation in Washington DC earlier this year, NDC chief executive Dr John Bridge warned: “Given the nature of globalisation, major investments are likely to be much more significant in scale than was the case in the past and will be competed for very aggressively by countries and regions.” His message is simple. Agencies have to adapt to the needs of the new global companies to win and keep their investment.

Cheap factories and big grants may no longer do the trick.

Sarah Perrin is a freelance journalist.