Iceland as a Shared Services Destination Study of Iceland’s Suitability and Advantages
Phase I – Report
June 24, 2015
0 Copyright © 2015 ScottMadden, Inc. All rights reserved.
Report _2015
Contents Project Overview: Phase 1
Page
Shared Services and Outsourcing Business Cases
Page
Project Objectives
3
Business Case 1: Icelandic Company, New SSC
20
Key Findings
4
Business Case 2: Foreign Company, New SSC
22
Key Recommendations
5
Business Case 3: Icelandic Company, New R&D Center
24
ScottMadden’s Approach
6
Business Case Outcomes Summary and Overall Takeaways
26
Roles and Responsibilities
7
Summary and Recommendations for Shared Services in Iceland
Tasks and Schedule
8
Research Summary and Takeaways
28
Opportunities for Shared Services and Outsourcing in Iceland
29 30
Shared Services Overview What Is Shared Services?
10
Recommendations
Why Companies Offshore Their SSCs
11
Appendices
Doing Business In Iceland SWOT Analysis
13
Appendix A: Detailed Location Criteria Assessments
31
Appendix B: Business Case Scenarios (Detailed)
49
Iceland Location Assessment: Strengths and Weaknesses 14
Appendix C: Summary of Interviews/External Business Contacts 81
Reykjavik’s Competitiveness
15
Appendix D: SSC Outsource Providers Marketing Assessment
87
Shared Services Providers and Outsourcers in Iceland
16
Appendix E: Responses to Promote Iceland’s Questions
90
Quality of Life in Iceland
17
Appendix F: How to Improve Iceland’s Competitiveness
97
Appendix G: Promote Iceland’s Support of Local Industries
99
1 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Project Overview: Phase 1
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 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Project Overview: Phase 1
Key Findings Iceland’s Strengths and Challenges
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
Perspectives of Icelandic Companies
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
Shared Services and Outsourcing in Iceland
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
4 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Project Overview: Phase 1
Key Recommendations 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
5 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Project Overview: Phase 1
ScottMadden’s Approach Phase I
Assess Business Environment in Iceland
Confirm Objectives and Work Plan
■ ■ ■ ■ ■ ■
Confirm project objectives
Review marketing information from other countries/locations
Review information and interview executives of companies operating in Iceland
Based on Iceland’s capabilities, develop likely external location/company criteria
Gather information on Icelandic business relationships outside of Iceland
Gather information on other locations for benchmark comparisons
Compile information on business environment in Iceland and potential for shared services
Develop current strengths and opportunities for Iceland
Summarize market positioning for Iceland
Present plan to stakeholders Refine information collection templates and interview guides
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
Deliverables
■ ■
Work plan Kickoff presentation
6
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
Refine factors to be compared with other locations/countries Deliverables
Deliverables
Deliverables
Matrix of companies operating in Iceland
List of external business contacts
Comparison of factors from Iceland and other locations
Results from selected outsourcing companies and target companies for captive shared services
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Finalize Recommendations and Target Markets
Benchmark Iceland with Other Locations
Develop tentative work plan Request/review information on Iceland
Phase II
Tentative advantages and potential of Iceland for hosting shared services
Final report explaining advantages/disadvantages, target market characteristics, and potential branding for Iceland
Project Overview: Phase 1
Team Roles and Responsibilities 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
andri@islandsstofa.is
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
thordur@invest.is (+354) 511-4000 (office) (+354) 824-4461 (mobile)
Arnar Gudmundsson
Project Manager
Support ScottMadden with Iceland “Location Criteria” and arranging meetings with Iceland ministries
anar@invest.is (+354) 822-5924 (mobile)
Erna Bjornsdottir
Project Manager
Support ScottMadden with arranging meetings with domestic companies and associations
erna@islandstofa.is (+354) 824-4370 (mobile)
Doug Utley Partner, ScottMadden
Engagement Partner
dutley@scottmadden.com 919-714-7631 (office) 919-349-1504 (mobile)
Mark Ladisch Associate, ScottMadden
Consultant
Plan and manage project Provide guidance to Provide Iceland Develop analysis and recommendations Assist with gathering and organizing
7 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
information Assist with analysis Draft deliverables
markladisch@scottmadden.com (404) 564-7366 (office) (765) 491-6778 (mobile)
Project Overview: Phase 1
Tasks and Schedule Phase 1:
■
May 18–June 16, 2015
Phase Phase I
Phase II
Month 1 Major Task Sub-Tasks 1 2 3 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
8 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
4
5
Month 2 6 7
8
Month 3 9 10
Shared Services Overview
Shared Services Overview
What Is Shared Services? Business Unit F
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
Business Unit A
Business Unit E
Business Unit D
SSC
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 10 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Unit B
Business Unit C
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 hightransaction 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
Shared Services Overview
Why Companies Offshore Their SSCs Top Three Reasons Cost
Talent
Location
11
Considerations
Lower wages, salaries, and benefits Lower corporate taxes Lower real estate costs Larger quantity of available workers Higher education level of workers Lower worker turnover rate Alignment of time zones to operations and clients Language needs and cultural fit Accessibility and convenience of travel
Advantage Provided Labor arbitrage
Scalability and access to talent
Convenience and access to operations and clients
Sources: 5. “Setting Up an Offshore SSC,” SSON, 2012 1. “Where Will Shared Services Go Next,” Deloitte, 2014 6. “Learning from the Masters,” Accenture, 2009 2. “Centralized Operations,” EY, February 2014 3. “A structured Approach to Shared Services,” Infosys, 2010
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Doing Business in Iceland
Doing Business in Iceland
SWOT Analysis* Strengths
Highly educated labor force Strong work ethic (culture) Flexible workforce Stable political climate Well-developed infrastructure Low-cost, renewable energy resources Competitive corporate income tax rate
Weaknesses
High labor rates Small labor force Limited college graduates from IT and engineering fields Limited economic stability
Opportunities
Demand for niche market, analytical, and consultative
services Demand for low-cost, renewable energy
Threats
Large shared services industry that can compete with
local Icelandic companies International reputation for environmental disturbances (volcanic eruptions)
13 *For the detailed analysis on each of Iceland’s strengths and weaknesses, see the detailed location factor comparisons in Appendix A. Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Doing Business in Iceland
Iceland Location Assessment: Strengths/Weaknesses Criteria Political Stability Crime Rate Logistics / Convenience Electricity Reliability Water Reliability Telephone Penetration Internet Penetration Disaster Frequency^ Tax Breaks & Incentives Real Estate Costs^ Education Levels Language Capabilities Ease of Doing Business^ Staff Turnover Rate^ Labor Costs^ Labor Supply Economic Stability
Units
1 Index 1 - 100 Reykjavik - 92 Index 0 - 7 Reykjavik - 6.3 Index 0 - 7 Reykjavik - 5.9 Index 0 - 7 Reykjavik - 6.8 Penetration Reykjavik - 100% Penetration Reykjavik - 58% Penetration Reykjavik - 95% Index 0 - 10 Reykjavik - 1.45 Index 0 - 1 Reykjavik - 0.96 $/Sq. Ft. San Jose - $4 Tert. Grad % Miami - 94% English Fluency Miami - High Ranking 1 - 189 Miami - 7 Percentage Miami - 2.4% Tot. Emp. Cost Kuala Lumpur - $23k Index 0 - 1 Kuala Lumpur - 0.90 Index 0 - 7 Kuala Lumpur - 5.3 Key: Strong ^ Low score is more competitive
2 Prague - 84 Prague - 5.4 Miami - 5.5 Prague - 6.5 Prague - 99.8% Miami - 48% Miami - 78% Prague - 2.03 Prague - 0.80 Reykjavik - $10 Reykjavik - 81% Reykjavik - High Reykjavik - 12 Prague - 12.7% Prague - $32k Miami - 0.62 Prague - 5.2 Neutral
Weak
Methodology (in brief)
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
14 Footnote: See Appendix A for detailed analysis. Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Ranking 3 4 5 San Jose - 67 Miami - 66 Kuala Lumpur - 48 Kuala Lumpur - 4.9 Miami - 4.5 San Jose - 3.9 Kuala Lumpur - 5.4 Prague - 4.7 San Jose - 2.9 Miami - 6.0 Kuala Lumpur - 5.9 San Jose - 5.5 Kuala Lumpur - 99.6% Miami - 99.2% San Jose - 96.6% San Jose - 32% Prague - 21% Kuala Lumpur - 15% Prague - 73% Kuala Lumpur - 61% San Jose - 42% Kuala Lumpur - 3.38 San Jose - 4.85 Miami - 7.58 Kuala Lumpur - 0.78 San Jose - 0.38 Miami - 0.2 Prague - $30 Kuala Lumpur - $32 Miami - $40 Prague - 64% San Jose - 47% Kuala Lumpur - 37% Kuala Lumpur - High Prague - Moderate San Jose - Low Kuala Lumpur - 18 Prague - 44 San Jose - 83 Reykjavik - 13.0% San Jose - 15% Kuala Lumpur - 15.7% San Jose - $53k Reykjavik - $56k Miami - $75k Prague - 0.56 San Jose - 0.48 Reykjavik - 0.00 San Jose - 4.7 Miami - 4.0 Reykjavik - 3.7
Summary
Strengths: infrastructure, political stability, and natural disaster frequency, corporate income tax Weaknesses: labor rates, labor supply, and economic stability
Doing Business in Iceland
Reykjavik’s Competitiveness 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
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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
Criteria
Importance
Reykjavik's Competitiveness
High High High Medium Medium Medium Medium Low Low Low Low Low Low Low Low Low Low Low
Weak Weak Neutral Neutral Neutral Strong Weak Strong Neutral Neutral Strong Strong Strong Strong Strong Strong Strong Neutral
Labor Supply Labor Costs Education Levels Language Capabilities Staff Turnover Rate Political Stability Economic Stability Logistics / Convenience Ease of Doing Business Real Estate / Facility Costs Tax Breaks & Incentives Crime Rate Electricity Reliability Water Reliability Telephone Penetration Internet Penetration Disaster Frequency Cultural Acceptance
15 Sources: 1. “Global Shared Services Survey Results,” Deloitte, 2013; 2. “Services Offshoring Ranking,” Towers Watson, 2013 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Doing Business in Iceland
Shared Services Providers and Outsourcers in Iceland Examples of shared services providers and outsourcers in Iceland: Shared Services Providers
Advania (IT) Attendus (HR) Icelandair (HR, F&A) KPMG (HR, IT, F&A)
Iceland Customers of Shared Services
Attendus (payroll, F&A) Icelandair (IT – helpdesk) Meniga (F&A, software development) Ossur (F&A)
Captive SSCs
Skipti/Siminn (Communications, legal,
F&A) Icelandair (HR) Ossur (IT)
Company Profiles: Examples of shared services providers in Iceland Icelandair
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
Advania
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 16 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Doing Business 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 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Shared Services and Outsourcing Business Cases
Shared Services and Outsourcing Business Cases
Layout of Business Cases Case 1: Icelandic Company, New SSC
Scenarios Case 2: Foreign Company, New SSC
Case 3: Icelandic Company, New R&D Center
Energy Engineering, Inc. Captive Shared Services Center Reykjavik, Iceland
Tech Distribution, Inc. Captive Shared Services Center New York, USA
Energy Engineering, Inc. Geothermal Energy R&D Services Reykjavik, Iceland
25
100
25
Real Estate (sq. ft.) Real Estate Description
6,500 Rent: Urban, Modern
26,000 Rent: Urban, Modern
10,000 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
Category Company Attributes Sample Companies SSC/Outsourcing Function Headquarters Location Labor, Real Estate, Operations Number of Employees 1
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
19
Source: 1. “Revisiting Office Space Standards,” Haworth, 2015
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Shared Services and Outsourcing Business Cases
Business Case 1: Introduction and Relevancy Company Profile and SSC Specifications Company*: Energy Engineering, Inc. (EEI) Business: EPC and Engineering Consulting Firm Industries: Energy, Industry, and Infrastructure
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.
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
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.
20
*An invented Engineering, Procurement, and Construction (EPC) company and energy engineering consultancy modeled after the Icelandic company Mannvit.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Shared Services and Outsourcing Business Cases
Business Case 1: Findings and Takeaways Location Criteria Score Rank
City
Weighted Score*
1
Kuala Lumpur, Malaysia
68
2
Prague, Czech Republic
62
3
Miami, United States
61
4
Reykjavik, Iceland
52
5
San Jose, Costa Rica
32
*100-point scale 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
21 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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 Key Assumptions: Annual Income: Discount Rate: Implementation Costs:
$3,250,000 7.7% Kuala Lumpur: $1,500,000 Reykjavik: $800,000
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
Shared Services and Outsourcing Business Cases
Business Case 2: Introduction and Relevancy Company Profile1 and SSC Specifications Company*: Tech Distribution, Inc. (TDI) Business: IT Equipment and Services Headquarters Location: New York, United States
Project Introduction 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.
Number of Employees: 3,000 Annual Revenues: $4,000,000,000 SSC Specifications: 26,000 square feet 100 employees Rental space: modern, urban
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.
Business Case Relevancy 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.
22
*An invented technology distribution and services company modeled after the New York-based company Westcon Group. Sources: 1. Inc.com/profile/Westcon-group
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Shared Services and Outsourcing Business Cases
Business Case 2: Findings and Takeaways Location Criteria Score Rank
City
Weighted Score*
1
Kuala Lumpur, Malaysia
68
2
Prague, Czech Republic
62
3
Miami, United States
61
4
Reykjavik, Iceland
52
5
San Jose, Costa Rica
32
Financial Comparison * Taxes, Labor, and Real Estate Represent Year 1 Costs Reykjavik Kuala Lumpur 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% Payback Period 6.4 1.4 Key Assumptions: Annual Income: Discount Rate: Implementation Costs:
$9,000,000 7.7% $1,500,000 (Equivalent for all cities)
*100-point scale Summary: Location Criteria Score: Low labor supply and high labor costs are the primary drivers 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
23 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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
Shared Services and Outsourcing Business Cases
Business Case 3: Introduction and Relevancy Company Profile Company*: Energy Engineering, Inc. (EEI) Business: EPC and Engineering Consulting Firm Industries: Energy, Industry, and Infrastructure
Project Introduction 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.
Headquarters Location: Reykjavik, Iceland Number of Employees: 400 Annual Revenues: $37,000,000 SSC Specifications: 10,000 square feet 25 employees Rental space: modern, urban
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 R&D center between three of the cities.
Business Case Relevancy 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.
24 *An invented Engineering, Procurement, and Construction (EPC) company and energy engineering consultancy modeled after the Icelandic company Mannvit. Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Shared Services and Outsourcing Business Cases
Business Case 3: Findings and Takeaways Location Criteria Score Rank
City
Weighted Score*
1
Reykjavik, Iceland
74
2
Miami, United States
68
3
Prague, Czech Republic
57
4
Kuala Lumpur, Malaysia
51
5
San Jose, Costa Rica
20
*100-point scale Summary: Location Criteria Score: 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 Financial Comparison: 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
25 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Financial Comparison * Taxes, Labor, and Real Estate Represent Year 1 Costs 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 Key Assumptions: Annual Income: Discount Rate: Implementation Costs:
$4,000,000 7.7% Miami: $1,500,000 Reykjavik: $1,200,000 Prague: $1,500,000
Takeaways: Reykjavik falls short on cost alone, but because of Reykjavik’s significant advantage in specialized expertise, Reykjavik wins over Prague
Shared Services and Outsourcing Business Cases
Business Case Outcomes Summary and Overall Takeaways Business Case Outcomes:
Case 1: Icelandic Company, New SSC Company: Energy Engineering, Inc. (EEI) Headquarters Location: Reykjavik, Iceland 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 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 3: Icelandic Company, New R&D Center Company: Energy Engineering, Inc. (EEI) Headquarters Location: Reykjavik, Iceland Reykjavik Competitiveness: Location Criteria Assessment: Reykjavik competitive because focus is on labor and infrastructure quality Financial Comparison: Reykjavik somewhat competitive because competing with higher cost locations
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Takeaways:
Reykjavik is challenged by its relatively high labor rates, high tax rates, and limited labor supply
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
Summary and Recommendations for Shared Services in Iceland
Summary and Recommendations for Shared Services in Iceland
Research Summary and Takeaways Iceland’s Strengths
Talented labor force
• Well-educated • Problem solvers • Underemployed Strong work ethic (culture) Well-developed infrastructure Low-cost, green energy Competitive corporate income tax rate
Iceland’s Weaknesses
Limited labor supply High labor cost for transactional services
hinder Iceland’s competitiveness for high transaction SSCs Icelandic firms more likely to keep SSC in Iceland than foreign firms to move to Iceland
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
Limited labor supply and high labor costs
Iceland’s Opportunities/Threats
Perspectives of Icelandic Companies
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 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
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Summary and Recommendations for Shared Services in Iceland
Opportunities for Shared Services and Outsourcing in Iceland Core Competency: Fisheries and Marine Transportation
Core Competency: Geothermal/Hydro Power
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
Areas of Focus: R&D services for geothermal and hydro power Energy industry shared services (HR, F&A, IT, etc.)
Strengths for Iceland: Local market demand for services Strong expertise in fisheries and global transportation
Strengths for Iceland: Local market for services Low-cost, renewable energy Well-educated labor force Expertise in renewable power
Challenges for Iceland: Limited supply of college graduates with relevant degrees for shared services roles
Challenges for Iceland: Limited supply of engineers and college graduates with relevant degrees for shared services roles
29
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
Strengths for Iceland: Low-cost, green energy Convenient location between the United States and Europe for limited shipping distances Flexible, well-educated labor force
Challenges for Iceland: 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.
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Summary and Recommendations for Shared Services in Iceland
Recommendations Where to Focus
1
2
Recruitment of foreign companies to Iceland to establish
Where to Focus:
SSCs • First, build more success stories with local Icelandic companies to help bolster reputation
Geography: Icelandic companies as shared services providers • Attracting foreign SSCs to Iceland will be difficult due to labor supply and labor rates
Large shared services providers
• Labor supply is too limited for the required scale of operations
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
Large businesses as clients
• Labor supply is limited for needed scalability • Cost pressures and competition may be greater with larger clients
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
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Where Not to Focus
3
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
Appendix A: Detailed Location Criteria Assessments
Appendix A: Detailed Location Criteria Assessment
Location Criteria and SSC Descriptions 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
Labor Supply/Quality
Crime rate
Crimes and rates of crime in various locations
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
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
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Cities served by airport Availability of flights by destination
Appendix A: Detailed Location Criteria Assessment
Location Criteria and SSC Descriptions (Cont’d) Criteria
Criteria
Infrastructure
Other
Power and water reliability
Sources of power and water
Telecom/internet reliability
Telephone access (landlines and cell phone accounts) Internet access (internet accounts) Broadband providers and available bandwidths
Natural disaster frequency
Ease-of-doing-business index1
Index that evaluates the factors considered when starting, operating, or discontinuing a business
History, frequency of volcanic activity and other natural threats Options for business continuity/disaster response
SSC Descriptions: SSC Type
Work Description
Tier 1
Transactional services (call center, payroll processing)
Tier 2
Complex services (analytical and consultative services)
1Ease-of-doing-business
33
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.
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Labor Costs 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.
Wages/Salaries Mandatory Emp. Contribution (%) Total Employer Cost*
34
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
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
$47,439
$20,636
$23,873
$23,873
$57,305
18%
14%
34%
28%
32%
$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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Real Estate Facility Costs 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.
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
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
35
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
$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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Tax Breaks and Incentives Tax Breaks and Incentives Assessment:
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
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.
Takeaways: Reykjavik has the second most competitive tax structure behind Kuala Lumpur
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.
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
Corp. Income Tax
20%
25%
19%
30.3%
40.5%
Tax Credits or Allowances
Yes
Yes
No
No
Yes
36
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Education Levels 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 highlevel 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.
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
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
Tertiary Edu. Enrollment %
81%
37%
64%
47%
94%
Annual Tertiary Graduation (#)
4,099
261,819
107,773
44,575
3,308,494
37
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Labor Supply 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.
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
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*
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%
Total Labor Force (‘000s)
38
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Language Capabilities 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.
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
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
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%
39
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Local Turnover Rates 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
40
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
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Political Stability 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.
Key Findings: Rated the highest amongst the benchmark cities Takeaways: Reykjavik has a comparatively high government effectiveness
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
41
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Economic Stability 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.
Key Findings: Reykjavik rated the lowest of the benchmark countries IMF debt load and labor wage disputes among the concerns for continued economic stability
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.
Takeaways: Economic stability has been improving; however, the economic environment in Reykjavik is currently a weakness compared to the benchmark countries
Economic Stability
42
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Crime Rate Crime Rate Assessment:
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
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.
Homicide Rate Business Costs of Crime and Violence
43
Takeaways: Low crime rate and low cost of crime in Reykjavik is an advantage compared to the benchmark countries
Reykjavik
Kuala Lumpur*
Prague
San Jose
Miami
1
70
18
55
69
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Logistics/Convenience 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.
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
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
44
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Power and Water Reliability Power and Water Reliability Assessment:
Key Findings: 100% of the population of Reykjavik has access to clean water Reykjavik has the highest rated electric supply of the benchmark countries
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.
Takeaways: The accessibility and reliability of the water and electric supply is a strength for Reykjavik
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
Access to Clean Water (%)
45
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
6.8
5.9
6.5
5.5
6.0
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Telecom and Internet Reliability 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.
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
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
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
46
Footnote: Fixed Telephone Lines: Count of number of lines per 100 people Source: Global Competitiveness Report 2012–2013 – World Economic Forum
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Natural Disaster Frequency 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.
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
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
47
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
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
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Appendix A: Detailed Location Criteria Assessment
Iceland Location Assessment: Ease of Doing Business 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
48
Takeaways: Reykjavik has a supportive environment for new and operating businesses
Reykjavik
Kuala Lumpur
Prague
San Jose
Miami
12
18
44
83
7
Footnote: Ease of Doing Business rankings from 1–189 (1 = best, 189 = worst) Source: World Bank Group
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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
Appendix B: Business Case Scenarios (Detailed)
Business Case 1: Icelandic Company Developing a SSC
Business Case 1: Icelandic Company Developing a SSC
Introduction and Relevancy Company Profile Company*: Energy Engineering, Inc. (EEI) Business: EPC and Engineering Consulting Firm Industries: Energy, Industry, and Infrastructure
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.
Headquarters Location: Reykjavik, Iceland Number of Employees: 400 Annual Revenues: $37,000,000
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.
51
*An invented Engineering, Procurement, and Construction (EPC) company and energy engineering consultancy modeled after the Icelandic company Mannvit.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 1: Icelandic Company Developing a SSC
Service Center Description and Location Selection Criteria SSC Specifications Facility Size: 6,500 square feet . Number of On-site Employees: 25 Building Requirements: Modern space Rental Space Urban environment
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
The weights suggest that critical location characteristics for the SSC are labor costs, labor supply, and labor quality.
52 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 1: Icelandic Company Developing a SSC
Location Selection Criteria Scoring Sheet Reykjavik, Iceland Weights*
Criteria
Geopolitical 4.0% Political Stability 4.0% Economic Stability 2.0% Crime Rate Costs 14.0% Labor Costs^ 2.0% Real Estate / Facility Costs^ 2.0% Tax Breaks & Incentives Labor Supply / Quality 12.0% Education Levels 28.0% Labor Supply 8.0% Language Capabilities 6.0% Staff Turnover Rate Cultural 2.0% Cultural Acceptance 3.0% Logistics / Convenience Infrastructure 2.0% Electricity Reliability 2.0% Water Reliability 2.0% Telephone Penetration 2.0% Internet Penetration 2.0% Disaster Frequency^ Other 3.0% Ease of Doing Business Overall Weighted Score
Kuala Lumpur, Malaysia
San Jose, Costa Rica
Miami, United States
Prague, Czech Republic
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
92 3.7 6.3
100.00 0.00 100.00
4.00 0.00 2.00
48 5.3 4.9
0.00 100.00 41.67
0.00 4.00 0.83
67 4.7 3.9
43.18 62.50 0.00
1.73 2.50 0.00
66 4 4.5
40.91 18.75 25.00
1.64 0.75 0.50
84 5.2 5.4
81.82 93.75 62.50
3.27 3.75 1.25
56452 10.20 0.96
46.89 83.04 100.00
6.56 1.66 2.00
23576 31.76 0.78
100.00 22.96 75.61
14.00 0.46 1.51
53926 4.11 0.38
50.97 100.00 23.54
7.14 2.00 0.47
85480 40.00 0.20
0.00 0.00 0.00
0.00 0.00 0.00
32539 29.76 0.80
85.52 28.54 78.66
11.97 0.57 1.57
0.81 0.00 2.00 0.13
77.36 0.00 100.00 20.30
9.28 0.00 8.00 1.22
0.37 0.90 2.00 0.16
0.00 100.00 100.00 0.00
0.00 28.00 8.00 0.00
0.47 0.48 0.00 0.15
16.72 53.57 0.00 5.26
2.01 15.00 0.00 0.32
0.94 0.62 2.00 0.02
100.00 69.41 100.00 100.00
12.00 19.43 8.00 6.00
0.64 0.56 1.00 0.13
47.26 61.87 50.00 22.93
5.67 17.32 4.00 1.38
3.00 5.87
100.00 100.00
2.00 3.00
2 5.43
66.67 85.24
1.33 2.56
0 2.88
0.00 0.00
0.00 0.00
3 5.48
100.00 86.91
2.00 2.61
1 4.73
33.33 61.84
0.67 1.86
6.80 100.00 58.40 0.95 1.45
100.00 100.00 100.00 100.00 100.00
2.00 2.00 2.00 2.00 2.00
5.90 99.60 14.70 0.61 3.38
30.77 88.24 0.00 35.73 68.52
0.62 1.76 0.00 0.71 1.37
5.50 96.60 31.50 0.42 4.85
0.00 0.00 38.44 0.00 44.54
0.00 0.00 0.77 0.00 0.89
6.00 99.20 47.90 0.78 7.58
38.46 76.47 75.97 67.67 0.00
0.77 1.53 1.52 1.35 0.00
6.50 99.80 20.90 0.73 2.03
76.92 94.12 14.19 58.41 90.54
1.54 1.88 0.28 1.17 1.81
12
93.42
2.80 52.53
18
85.53
2.57 67.73
83
0.00
0.00 32.82
7
100.00
3.00 61.10
44
51.32
1.54 61.51
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.
53 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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.”
Business Case 1: Icelandic Company Developing a SSC
Initial City Selection – Location Criteria Scores Completed quantitative analysis on the five selected cities: Rank
City
Weighted Score*
1
Kuala Lumpur, Malaysia
68
2
Prague, Czech Republic
62
3
Miami, United States
61
4
Reykjavik, Iceland
52
5
San Jose, Costa Rica
33
*100-point scale
Kuala Lumpur has the best fit with EEI’s location selection criteria.
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Business Case 1: Icelandic Company Developing a SSC
Financial Evaluation: Inputs and Assumptions Inputs and Assumptions Annual Total Cost per Employee Real Estate Costs ($/sq. ft.) Annual Travel Costs from HQ (15 Round Trips – Airfare)1 (Business Class) Corporate Tax Rate (Income Tax and VAT) Average Staff Turnover Rate (for SSC roles) Annual Expatriate Employee Cost2 (3 expatriates at 2 X Icelandic employee cost) Setup Costs (Assumptions for Travel, Hiring, etc.) Revenue and Cost Growth Rate and Discount Rate3 Annual Revenue (Assumption)
55
Description
Kuala Lumpur: Reykjavik:
$23,576 $56,452
Kuala Lumpur: Reykjavik:
$31.76 $10.20
Kuala Lumpur: Reykjavik:
$135,000 $0
Kuala Lumpur: Reykjavik:
25.0% 20.0%
Kuala Lumpur: Reykjavik:
15.7% 13.0%
Kuala Lumpur: Reykjavik:
$338,712 $0
Kuala Lumpur: Reykjavik:
$1,500,000 $800,000
Growth Rate: Discount Rate:
3.0% 7.7%
$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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 1: Icelandic Company Developing a SSC
Financial Evaluation: Kuala Lumpur, Malaysia Icelandic Company - Captive SSC: Kuala Lumpur, Malaysia 0 2015 Revenue Income $0 Total Revenue $0 Taxes Taxes Corporate Income Tax Value Added Tax Total Taxes $0 Recurring Costs Labor Salary/Wages & Employer Contrib. $928,112 Turnover $15,700 Real Estate / Facilities Real Estate (Rental Property) $206,440 Other Management Travel $135,000 Total Recurring Costs $1,285,252 Implementation Costs One-time Costs $1,500,000 Total Implementation Costs $1,500,000 Total Annual Costs $2,785,252 Net Cash Flow Cumulative Cash Flow 5-Yr Net Present Value 5-Year Internal Rate of Return (IRR) Payback Period (Years)
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($2,785,252) -2,785,252 ($2,785,252) 0 $4,474,412 64% 1.6
1 2016
2 2017
3 2018
4 2019
5 2020
$3,250,000 $3,250,000
$3,347,500 $3,347,500
$3,447,925 $3,447,925
$3,551,363 $3,551,363
$3,657,904 $3,657,904
$568,766 $0 $568,766
$585,829 $0 $585,829
$603,404 $0 $603,404
$621,506 $0 $621,506
$640,151 $0 $640,151
$607,082 $16,171
$625,294 $16,656
$644,053 $17,156
$663,375 $17,670
$683,276 $18,201
$212,633
$219,012
$225,583
$232,350
$239,321
$139,050 $974,936
$143,222 $1,004,184
$147,518 $1,034,310
$151,944 $1,065,339
$156,502 $1,097,299
$0 $1,543,702
$0 $1,590,013
$0 $1,637,714
$0 $1,686,845
$0 $1,737,450
$1,706,298 $1,584,306 ($1,078,954) 0
$1,757,487 $1,515,168 $678,533 1
$1,810,211 $1,449,046 $2,488,744 1
$1,864,518 $1,385,810 $4,353,262 1
$1,920,453 $1,325,334 $6,273,715 1
Business Case 1: Icelandic Company Developing a SSC
Financial Evaluation: Reykjavik, Iceland Icelandic Company - Captive SSC: Reykjavik, Iceland 0 2015 Revenue Income Total Revenue Taxes Taxes Corporate Income Tax Value Added Tax Total Taxes Recurring Costs Labor Salary/Wages & Employer Contrib. Turnover Real Estate / Facilities Real Estate (Rental Property) Other Management Travel Total Recurring Costs Implementation Costs One-time Costs Total Implementation Costs Total Annual Costs Net Cash Flow Cumulative Cash Flow 5-Yr Net Present Value 5-Year Internal Rate of Return (IRR) Payback Period (Years)
57 Copyright Š 2015 by ScottMadden, Inc. All rights reserved.
1 2016
2 2017
3 2018
4 2019
5 2020
$0 $0
$3,250,000 $3,250,000
$3,347,500 $3,347,500
$3,447,925 $3,447,925
$3,551,363 $3,551,363
$3,657,904 $3,657,904
$0
$326,100 $0 $326,100
$335,883 $0 $335,883
$345,960 $0 $345,960
$356,338 $0 $356,338
$367,028 $0 $367,028
$1,411,300 $12,700
$1,453,639 $13,081
$1,497,248 $13,473
$1,542,166 $13,878
$1,588,431 $14,294
$1,636,084 $14,723
$148,330
$152,780
$157,363
$162,084
$166,947
$171,955
$0 $1,572,330
$0 $1,619,500
$0 $1,668,085
$0 $1,718,127
$0 $1,769,671
$0 $1,822,761
$800,000 $800,000 $2,372,330
$0 $1,945,600
$0 $2,003,968
$0 $2,064,087
$0 $2,126,010
$0 $2,189,790
$1,304,400 1,211,142 ($1,067,930) 0
$1,343,532 1,158,288 $275,602 1
$1,383,838 1,107,741 $1,659,440 1
$1,425,353 1,059,399 $3,084,793 1
$1,468,114 1,013,167 $4,552,907 1
($2,372,330) -2,372,330 ($2,372,330) 0 $3,177,408 57% 1.8
Business Case 1: Icelandic Company Developing a SSC
Financial Evaluation Summary 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
Compared to Kuala Lumpur, Reykjavik has significantly less competitive labor rates
Given the significant advantages in the IRR and payback period, Kuala Lumpur is a more competitive SSC destination than Reykjavik
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
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Business Case 1: Icelandic Company Developing a SSC
Business Case Summary and Takeaways 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
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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
Business Case 2: Foreign Company Developing a SSC
Introduction and Relevancy Company Profile1 Company*: Tech Distribution, Inc. (TDI) Business: IT Equipment and Services Headquarters Location: New York, United States
Project Introduction 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.
Number of Employees: 3,000 Annual Revenues: $4,000,000,000
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.
Business Case Relevancy 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.
61
Sources: 1. Inc.com/profile/Westcon-group *An invented technology distribution and services company modeled after the New York-based company Westcon Group.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 2: Foreign Company Developing a SSC
Service Center Description and Location Selection Criteria SSC Specifications Facility Size: 26,000 square feet . Number of On-site Employees: 100 Building Requirements: Modern space Rental Space Urban environment
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 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
The weights suggest that the critical location characteristics for the SSC are labor costs, labor supply, and labor quality.
62 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 2: Foreign Company Developing a SSC
Location Selection Criteria Scoring Sheet Reykjavik, Iceland Weights*
Criteria
Geopolitical 4.0% Political Stability 4.0% Economic Stability 2.0% Crime Rate Costs 14.0% Labor Costs^ 2.0% Real Estate / Facility Costs^ 2.0% Tax Breaks & Incentives Labor Supply / Quality 12.0% Education Levels 28.0% Labor Supply 8.0% Language Capabilities 6.0% Staff Turnover Rate Cultural 2.0% Cultural Acceptance 3.0% Logistics / Convenience Infrastructure 2.0% Electricity Reliability 2.0% Water Reliability 2.0% Telephone Penetration 2.0% Internet Penetration 2.0% Disaster Frequency^ Other 3.0% Ease of Doing Business Overall Weighted Score
Kuala Lumpur, Malaysia
San Jose, Costa Rica
Miami, United States
Prague, Czech Republic
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
92 3.7 6.3
100.00 0.00 100.00
4.00 0.00 2.00
48 5.3 4.9
0.00 100.00 41.67
0.00 4.00 0.83
67 4.7 3.9
43.18 62.50 0.00
1.73 2.50 0.00
66 4 4.5
40.91 18.75 25.00
1.64 0.75 0.50
84 5.2 5.4
81.82 93.75 62.50
3.27 3.75 1.25
56452 10.20 0.96
46.89 83.04 100.00
6.56 1.66 2.00
23576 31.76 0.78
100.00 22.96 75.61
14.00 0.46 1.51
53926 4.11 0.38
50.97 100.00 23.54
7.14 2.00 0.47
85480 40.00 0.20
0.00 0.00 0.00
0.00 0.00 0.00
32539 29.76 0.80
85.52 28.54 78.66
11.97 0.57 1.57
0.81 0.00 2.00 0.13
77.36 0.00 100.00 20.30
9.28 0.00 8.00 1.22
0.37 0.90 2.00 0.16
0.00 100.00 100.00 0.00
0.00 28.00 8.00 0.00
0.47 0.48 0.00 0.15
16.72 53.57 0.00 5.26
2.01 15.00 0.00 0.32
0.94 0.62 2.00 0.02
100.00 69.41 100.00 100.00
12.00 19.43 8.00 6.00
0.64 0.56 1.00 0.13
47.26 61.87 50.00 22.93
5.67 17.32 4.00 1.38
3.00 5.87
100.00 100.00
2.00 3.00
2 5.43
66.67 85.24
1.33 2.56
0 2.88
0.00 0.00
0.00 0.00
3 5.48
100.00 86.91
2.00 2.61
1 4.73
33.33 61.84
0.67 1.86
6.80 100.00 58.40 0.95 1.45
100.00 100.00 100.00 100.00 100.00
2.00 2.00 2.00 2.00 2.00
5.90 99.60 14.70 0.61 3.38
30.77 88.24 0.00 35.73 68.52
0.62 1.76 0.00 0.71 1.37
5.50 96.60 31.50 0.42 4.85
0.00 0.00 38.44 0.00 44.54
0.00 0.00 0.77 0.00 0.89
6.00 99.20 47.90 0.78 7.58
38.46 76.47 75.97 67.67 0.00
0.77 1.53 1.52 1.35 0.00
6.50 99.80 20.90 0.73 2.03
76.92 94.12 14.19 58.41 90.54
1.54 1.88 0.28 1.17 1.81
12
93.42
2.80 52.53
18
85.53
2.57 67.73
83
0.00
0.00 32.82
7
100.00
3.00 61.10
44
51.32
1.54 61.51
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.
63 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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.”
Business Case 2: Foreign Company Developing a SSC
Initial City Selection – Location Criteria Scores Completed quantitative analysis on the five selected cities: Rank
City
Weighted Score*
1
Kuala Lumpur, Malaysia
68
2
Miami, United States
62
3
Prague, Czech Republic
61
4
Reykjavik, Iceland
52
5
San Jose, Costa Rica
33
*100-point scale
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.
64 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 2: Foreign Company Developing a SSC
Financial Assessment: Inputs and Assumptions Inputs and Assumptions Annual Total Cost per Employee Real Estate Costs ($/sq. ft.) Annual Travel Costs from HQ (25 Round Trips – Airfare)1 (Business Class) Corporate Tax Rate (Income Tax and VAT) Average Staff Turnover Rate (for SSC roles) Annual Expatriate Employee Cost2 (5 expatriates at 2 X U.S. benefits cost)
Description
Setup Costs (100 Round Trips, Hiring,
etc.)1
Kuala Lumpur: Reykjavik:
$23,576 $56,452
Kuala Lumpur: Reykjavik:
$31.76 $10.20
Kuala Lumpur: Reykjavik:
$225,000 $75,000
Kuala Lumpur: Reykjavik:
25.0% 20.0%
Kuala Lumpur: Reykjavik:
15.7% 13.0%
$854,800 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
Revenue and Cost Growth Rate and Discount Rate3
Growth Rate: Discount Rate:
Annual Revenue (Assumption)
$9,000,000
65
Sources: 1. Delta.com 2. “Expatriate Pay: Keeping Up with the Changing Paradigm”, ECA International 3. “Cost of Capital by Sector,” NYU Stern, 2015
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
3.0% 7.7%
Business Case 2: Foreign Company Developing a SSC
Financial Evaluation: Kuala Lumpur, Malaysia Foreign Company - Captive SSC: Kuala Lumpur, Malaysia 0 2015 Revenue Income $0 Total Revenue $0 Taxes Taxes Corporate Income Tax Value Added Tax Total Taxes $0 Recurring Costs Labor Salary/Wages & Employer Contrib. $3,212,400 Turnover $62,800 Real Estate / Facilities Real Estate (Rental Property) $825,760 Other Management Travel $225,000 Total Recurring Costs $4,325,960 Implementation Costs One-time Costs $1,500,000 Total Implementation Costs $1,500,000 Total Annual Costs $5,825,960 Net Cash Flow Cumulative Cash Flow 5-Yr Net Present Value 5-Year Internal Rate of Return (IRR) Payback Period (Years)
66 Copyright Š 2015 by ScottMadden, Inc. All rights reserved.
($5,825,960) -5,825,960 ($5,825,960) 0 $11,484,119 72% 1.4
1 2016
2 2017
3 2018
4 2019
5 2020
$9,000,000 $9,000,000
$9,270,000 $9,270,000
$9,548,100 $9,548,100
$9,834,543 $9,834,543
$10,129,579 $10,129,579
$1,356,176 $0 $1,356,176
$1,396,862 $0 $1,396,862
$1,438,767 $0 $1,438,767
$1,481,930 $0 $1,481,930
$1,526,388 $0 $1,526,388
$2,428,328 $64,684
$2,501,178 $66,625
$2,576,213 $68,623
$2,653,500 $70,682
$2,733,105 $72,802
$850,533
$876,049
$902,330
$929,400
$957,282
$231,750 $3,575,295
$238,703 $3,682,554
$245,864 $3,793,030
$253,239 $3,906,821
$260,837 $4,024,026
$0 $4,931,471
$0 $5,079,415
$0 $5,231,798
$0 $5,388,752
$0 $5,550,414
$4,068,529 $3,777,650 ($1,757,431) 0
$4,190,585 $3,612,794 $2,433,154 1
$4,316,302 $3,455,133 $6,749,456 1
$4,445,791 $3,304,352 $11,195,247 1
$4,579,165 $3,160,151 $15,774,412 1
Business Case 2: Foreign Company Developing a SSC
Financial Evaluation: Reykjavik, Iceland Foreign Company - Captive SSC: Reykjavik, Iceland 0 2015 Revenue Income Total Revenue Taxes Taxes Corporate Income Tax Value Added Tax Total Taxes Recurring Costs Labor Salary/Wages & Employer Contrib. Turnover Real Estate / Facilities Real Estate (Rental Property) Other Management Travel Total Recurring Costs Implementation Costs One-time Costs Total Implementation Costs Total Annual Costs Net Cash Flow Cumulative Cash Flow 5-Yr Net Present Value 5-Year Internal Rate of Return (IRR) Payback Period (Years)
67 Copyright Š 2015 by ScottMadden, Inc. All rights reserved.
1 2016
2 2017
3 2018
4 2019
$0 $0
$9,000,000 $9,000,000
$9,270,000 $9,270,000
$9,548,100 $9,548,100
$9,834,543 $9,834,543
$10,129,579 $10,129,579
$0
$312,861 $0 $312,861
$322,247 $0 $322,247
$331,915 $0 $331,915
$341,872 $0 $341,872
$352,128 $0 $352,128
$6,500,000 $50,800
$6,695,000 $52,324
$6,895,850 $53,894
$7,102,726 $55,511
$7,315,807 $57,176
$7,535,281 $58,891
$593,320
$611,120
$629,453
$648,337
$667,787
$687,820
$75,000 $7,219,120
$77,250 $7,435,694
$79,568 $7,658,764
$81,955 $7,888,527
$84,413 $8,125,183
$86,946 $8,368,939
$1,500,000 $1,500,000 $8,719,120
$0 $7,748,555
$0 $7,981,012
$0 $8,220,442
$0 $8,467,055
$0 $8,721,067
$1,251,445 1,161,973 ($7,467,675) 0
$1,288,988 1,111,265 ($6,178,686) 0
$1,327,658 1,062,770 ($4,851,028) 0
$1,367,488 1,016,391 ($3,483,540) 0
$1,408,513 972,036 ($2,075,028) 0
($8,719,120) -8,719,120 ($8,719,120) 0 -$3,394,686 10% 6.4
5 2020
Business Case 2: Foreign Company Developing a SSC
Optimal Location Assessment 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
Compared to Kuala Lumpur, Reykjavik has significantly less competitive labor rates
Given the significant advantages in the tax and labor rates, Kuala Lumpur offers a better IRR and shorter payback period
Financial Comparison * Taxes, Labor, and Real Estate Represent Year 1 Costs Reykjavik Kuala Lumpur 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% Payback Period 6.4 1.4
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Business Case 2: Foreign Company Developing a SSC
Business Case Summary and Takeaways Business Case Summary Optimal City: Kuala Lumpur, Malaysia SSC Profile: F&A SSC Rental Space Size: 26,000 square feet Employees: 100 . 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 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
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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
Introduction and Relevancy Company Profile Company*: Energy Engineering, Inc. (EEI) Business: EPC and Engineering Consulting Firm Industries: Energy, Industry, and Infrastructure
Project Introduction 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.
Headquarters Location: Reykjavik, Iceland Number of Employees: 400 Annual Revenues: $37,000,000
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 R&D center between three of the cities.
Business Case Relevancy 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.
71
*An invented Engineering, Procurement, and Construction (EPC) company and energy engineering consultancy modeled after the Icelandic company Mannvit.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Service Center Description and Location Selection Criteria SSC Specifications Facility Size: 10,000 square feet . Number of On-site Employees: 25 Building Requirements: Modern space Rental Space Urban environment
Site Selection Criteria
Criteria Weight (of 100%)
Labor Supply
8%
Labor Quality
33%
Labor Cost
12%
Location
32%
Risk
11%
Other
2%
Location Options
Opportunity
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
The weights suggest that critical location characteristics for the R&D engineering services center are labor quality and location (including infrastructure).
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Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Location Selection Criteria Scoring Sheet Reykjavik, Iceland Weights*
Criteria
Geopolitical 6.0% Political Stability 3.0% Economic Stability 2.0% Crime Rate Costs 6.0% Labor Costs^ 1.0% Real Estate / Facility Costs^ 6.0% Tax Breaks & Incentives Labor Supply / Quality 15.0% Education Levels 8.0% Labor Supply 8.0% Language Capabilities 10.0% Staff Turnover Rate Cultural 7.0% Cultural Acceptance 7.0% Logistics / Convenience Infrastructure 4.0% Electricity Reliability 4.0% Water Reliability 4.0% Telephone Penetration 5.0% Internet Penetration 2.0% Disaster Frequency^ Other 2.0% Ease of Doing Business^ Overall Weighted Score
Kuala Lumpur, Malaysia
San Jose, Costa Rica
Miami, United States
Prague, Czech Republic
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
Score
Normalized Score
Weighted Score
92 3.7 6.3
100.00 0.00 100.00
6.00 0.00 2.00
48 5.3 4.9
0.00 100.00 41.67
0.00 3.00 0.83
67 4.7 3.9
43.18 62.50 0.00
2.59 1.88 0.00
66 4 4.5
40.91 18.75 25.00
2.45 0.56 0.50
84 5.2 5.4
81.82 93.75 62.50
4.91 2.81 1.25
56452 10.20 0.96
46.89 83.04 100.00
2.81 0.83 6.00
23576 31.76 0.78
100.00 22.96 75.61
6.00 0.23 4.54
53926 4.11 0.38
50.97 100.00 23.54
3.06 1.00 1.41
85480 40.00 0.20
0.00 0.00 0.00
0.00 0.00 0.00
32539 29.76 0.80
85.52 28.54 78.66
5.13 0.29 4.72
0.81 0.00 2.00 0.13
77.36 0.00 100.00 20.30
11.60 0.00 8.00 2.03
0.37 0.90 2.00 0.16
0.00 100.00 100.00 0.00
0.00 8.00 8.00 0.00
0.47 0.48 0.00 0.15
16.72 53.57 0.00 5.26
2.51 4.29 0.00 0.53
0.94 0.62 2.00 0.02
100.00 69.41 100.00 100.00
15.00 5.55 8.00 10.00
0.64 0.56 1.00 0.13
47.26 61.87 50.00 22.93
7.09 4.95 4.00 2.29
3.00 5.87
100.00 100.00
7.00 7.00
2 5.43
66.67 85.24
4.67 5.97
0 2.88
0.00 0.00
0.00 0.00
3 5.48
100.00 86.91
7.00 6.08
1 4.73
33.33 61.84
2.33 4.33
6.80 100.00 58.40 0.95 1.45
100.00 100.00 100.00 100.00 100.00
4.00 4.00 4.00 5.00 2.00
5.90 99.60 14.70 0.61 3.38
30.77 88.24 0.00 35.73 68.52
1.23 3.53 0.00 1.79 1.37
5.50 96.60 31.50 0.42 4.85
0.00 0.00 38.44 0.00 44.54
0.00 0.00 1.54 0.00 0.89
6.00 99.20 47.90 0.78 7.58
38.46 76.47 75.97 67.67 0.00
1.54 3.06 3.04 3.38 0.00
6.50 99.80 20.90 0.73 2.03
76.92 94.12 14.19 58.41 90.54
3.08 3.76 0.57 2.92 1.81
12
93.42
1.87 74.15
18
85.53
1.71 50.86
83
0.00
0.00 19.68
7
100.00
2.00 68.17
44
51.32
1.03 57.27
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.
73 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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.”
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Initial City Selection – Location Criteria Scores Completed quantitative analysis on the five selected cities: Rank
City
Weighted Score*
1
Reykjavik, Iceland
74
2
Miami, United States
68
3
Prague, Czech Republic
57
4
Kuala Lumpur, Malaysia
51
5
San Jose, Costa Rica
20
*100-point scale
Reykjavik, Miami, and Prague have the best fit with EEI’s location selection criteria.
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Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Financial Evaluation: Inputs and Assumptions Inputs and Assumptions Annual Total Cost per Employee
Real Estate Costs ($/sq. ft.) Annual Travel Costs from HQ (15 Round Trips – Airfare)1 (Business Class) Corporate Tax Rate (Income Tax and VAT)
Average Staff Turnover Rate (for SSC roles)
Annual Expatriate Employee Cost2 (3 expatriates at 2 X Icelandic employee cost)
Setup Costs (Assumptions for Travel, Hiring, etc.)
Revenue and Cost Growth Rate and Discount Rate3 Annual Revenue (Assumption)
75
Sources: 1) Kayak.com; 2) www.eca-international.com; 3) Stern.NYU.edu
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Description
Miami: Reykjavik: Prague:
$85,480 $56,452 $32,539
Miami: Reykjavik: Prague:
$40.00 $10.20 $29.76
Miami: Reykjavik: Prague:
$45,000 $0 $10,000
Miami: Reykjavik: Prague:
41.0% 20.0% 19.0%
Miami: Reykjavik: Prague:
2.4% 13.0% 12.7%
Miami: Reykjavik: Prague:
$338,712 $0 $338,712
Miami: Reykjavik: Prague:
$1,500,000 $1,200,000 $1,500,000
Growth Rate: Discount Rate:
3.0% 7.7%
$4,000,000
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Financial Evaluation: Miami, United States Icelandic Company Engineering R&D Center: Miami, Florida USA 0 2015 Revenue Income $0 Total Revenue $0 Taxes Taxes Corporate Income Tax Value Added Tax Total Taxes $0 Recurring Costs Labor Salary/Wages & Employer Contrib. $2,475,712 Turnover $2,400 Real Estate / Facilities Real Estate (Rental Property) $400,000 Other Management Travel $45,000 Total Recurring Costs $2,923,112 Implementation Costs One-time Costs $1,500,000 Total Implementation Costs $1,500,000 Total Annual Costs $4,423,112 Net Cash Flow Cumulative Cash Flow 5-Yr Net Present Value 5-Year Internal Rate of Return (IRR) Payback Period (Years)
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($4,423,112) -4,423,112 ($4,423,112) 0 ($1,870,869) 8% 6.9
1 2016
2 2017
3 2018
4 2019
5 2020
$4,000,000 $4,000,000
$4,120,000 $4,120,000
$4,243,600 $4,243,600
$4,370,908 $4,370,908
$4,502,035 $4,502,035
$400,624 $0 $400,624
$412,643 $0 $412,643
$425,022 $0 $425,022
$437,772 $0 $437,772
$450,906 $0 $450,906
$2,549,983 $2,472
$2,626,483 $2,546
$2,705,277 $2,623
$2,786,436 $2,701
$2,870,029 $2,782
$412,000
$424,360
$437,091
$450,204
$463,710
$46,350 $3,010,805
$47,741 $3,101,130
$49,173 $3,194,163
$50,648 $3,289,988
$52,167 $3,388,688
$0 $3,411,429
$0 $3,513,772
$0 $3,619,185
$0 $3,727,761
$0 $3,839,594
$588,571 $550,066 ($3,834,541) 0
$606,228 $529,503 ($3,228,313) 0
$624,415 $509,708 ($2,603,898) 0
$643,147 $490,654 ($1,960,751) 0
$662,442 $472,312 ($1,298,310) 0
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Financial Evaluation: Reykjavik, Iceland Icelandic Company Engineering R&D Center - Reykjavik, Iceland 0 2015 Revenue Income $0 Total Revenue $0 Taxes Taxes Corporate Income Tax Value Added Tax Total Taxes $0 Recurring Costs Labor Salary/Wages & Employer Contrib. $1,411,300 Turnover $12,700 Real Estate / Facilities Real Estate (Rental Property) $228,200 Other Management Travel $60,000 Total Recurring Costs $1,712,200 Implementation Costs One-time Costs $1,500,000 Total Implementation Costs $1,500,000 Total Annual Costs $3,212,200 Net Cash Flow Cumulative Cash Flow 5-Yr Net Present Value 5-Year Internal Rate of Return (IRR) Payback Period (Years)
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($3,212,200) -3,212,200 ($3,212,200) 0 $4,546,151 58% 1.8
1 2016
2 2017
3 2018
4 2019
5 2020
$4,000,000 $4,000,000
$4,120,000 $4,120,000
$4,243,600 $4,243,600
$4,370,908 $4,370,908
$4,502,035 $4,502,035
$447,287 $0 $447,287
$460,705 $0 $460,705
$474,527 $0 $474,527
$488,762 $0 $488,762
$503,425 $0 $503,425
$1,453,639 $13,081
$1,497,248 $13,473
$1,542,166 $13,878
$1,588,431 $14,294
$1,636,084 $14,723
$235,046
$242,097
$249,360
$256,841
$264,546
$61,800 $1,763,566
$63,654 $1,816,473
$65,564 $1,870,967
$67,531 $1,927,096
$69,556 $1,984,909
$0 $2,210,853
$0 $2,277,178
$0 $2,345,494
$0 $2,415,859
$0 $2,488,334
$1,789,147 1,672,100 ($1,423,053) 0
$1,842,822 1,609,592 $419,769 1
$1,898,106 1,549,420 $2,317,875 1
$1,955,049 1,491,498 $4,272,925 1
$2,013,701 1,435,741 $6,286,625 1
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Financial Evaluation: Prague, Czech Republic Icelandic Company Engineering R&D Center: Prague, Czech Republic 0 1 2015 2016 Revenue Income $0 $4,000,000 Total Revenue $0 $4,000,000 Taxes Taxes Corporate Income Tax $471,834 Value Added Tax $0 Total Taxes $0 $471,834 Recurring Costs Labor Salary/Wages & Employer Contrib. $1,152,187 $1,186,753 Turnover $12,700 $13,081 Real Estate / Facilities Real Estate (Rental Property) $297,600 $306,528 Other Management Travel $10,000 $10,300 Total Recurring Costs $1,472,487 $1,516,662 Implementation Costs One-time Costs $1,500,000 Total Implementation Costs $1,500,000 $0 Total Annual Costs $2,972,487 $1,988,496 Net Cash Flow Cumulative Cash Flow 5-Yr Net Present Value 5-Year Internal Rate of Return (IRR) Payback Period (Years)
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($2,972,487) -2,972,487 ($2,972,487) 0 $5,750,079 70% 1.5
$2,011,504 $1,879,910 ($960,983) 0
2 2017
3 2018
4 2019
5 2020
$4,120,000 $4,120,000
$4,243,600 $4,243,600
$4,370,908 $4,370,908
$4,502,035 $4,502,035
$485,989 $0 $485,989
$500,569 $0 $500,569
$515,586 $0 $515,586
$531,054 $0 $531,054
$1,222,355 $13,473
$1,259,026 $13,878
$1,296,797 $14,294
$1,335,701 $14,723
$315,724
$325,196
$334,951
$345,000
$10,609 $1,562,161
$10,927 $1,609,026
$11,255 $1,657,297
$11,593 $1,707,016
$0 $2,048,151
$0 $2,109,595
$0 $2,172,883
$0 $2,238,070
$2,071,849 $1,809,633 $1,110,866 1
$2,134,005 $1,741,984 $3,244,871 1
$2,198,025 $1,676,863 $5,442,896 1
$2,263,966 $1,614,176 $7,706,861 1
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Optimal Location Assessment Financial Evaluation Summary:
Labor costs, taxes, and real estate costs are the most significant elements of the financial analysis
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
Financial Comparison * Taxes, Labor, and Real Estate Represent Year 1 Costs 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
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Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
Business Case Summary and Takeaways Business Case Summary Optimal Cities: Prague or Reykjavik SSC Profile: Multifunction SSC Rental Space Size: 6,500 square feet Employees: 25 . Location Criteria Assessment: 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 Financial Analysis (Reykjavik vs. Miami): Labor costs, taxes, and real estate costs are the most 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
80 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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
Appendix C: Summary of Interviews/External Business Contacts
Completed Interviews/List of External Business Contacts 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 Implications
Mr. Gudmundsson Mr. Bjornsdottir
Partner, Tax Partner, Tax
June 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
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
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June 10, 2015
Appendix C: Summary of Interviews/External Business Contacts
Interview Takeaways Company/Ministry
Interviewee
Title
Post and Telecom Administration
Mr. Birgisson
Specialist, Analytics
National Energy Authority
Mr. Einarsson
Senior Advisor
KPMG – Business Consultant
Mr. Olafsson
Project Manager, Business Consultancy
KPMG – Tax Implications
Mr. Gudmundsson Mr. Bjornsdottir
Partner, Tax Partner, Tax
Attendus
Ms. Jjaltadotti
Partner
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Key Takeaways
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 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 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 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
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
Appendix C: Summary of Interviews External Business Contacts
Interview Takeaways (Cont’d) Company/Ministry Icelandair
Interviewee Mr. Thorbergsson
Title Senior Vice President
Key Takeaways
Skipti/Siminn
Mr. Oskarsson
Manager Communications
Ministry for Foreign Affairs
Mr. Magnusson
Realtor
Mr. Skulason
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Director International Trade Negotiations
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 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 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 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
Appendix C: Summary of Interviews/External Business Contacts
Interview Takeaways (Cont’d) Company/Ministry Advania
Interviewee Mr. Jonsson
Title Manager Business Development and Operations
Key Takeaways
Hagvangur
Mr. Briem
Executive Search Consultant
Actavis
Ms. Magnusdottir
Executive Director R&D Iceland
Ministry of Industry and Innovation
Mr. Thorgrimsson
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Director General
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 Provides recruiting and headhunting services Workforce is flexible and willing to work hard Marketing and finance professionals abundant; engineers and IT specialists are limited 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
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
Appendix C: Summary of Interviews/External Business Contacts
Interview Takeaways (Cont’d) Company/Ministry Ossur
Interviewee Mr. Solvason
Title CFO
Key Takeaways
Meniga
Mr. Ludviksson
CEO
Kodi
Mr. Thordarson
86 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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 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
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
Appendix D: SSC Outsource Providers Marketing Assessment
Marketing Assessment: SSC Outsource Providers Accenture1
Services Offered
Packaged Solutions, One-Off, Both?
Description of Solution/Package
Marketing Sales Line
Market Discriminators
Where are solutions located?
Comments
Strategy services, digital services, technology & operations services (includes BPO, shared services, consultative services)
Capgemini2
Wipro3
Business process services (F&A, IT services, consulting, off-shore HR, procurement, legal, engineering services, analytics, CRM, sales & BPO/shared services (F&A, marketing, tech solutions), procurement, supply chain) project engineering, IT services, asset management, analytics
Infosys4
TCS5
IBM6
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)
One-Off
One-Off / Both
One-Off
One-Off / Both
One-Off
One-Off / Both
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
Global reach & scale, deep industry expertise, long-term experience
Expanded capabilities, topnotch talent, and powerful analytics
Multiple, global Fortune 500 clients
-Quantity and convenience of - Experience with large, global - Rated as top 3 F&A provider locations clients - Number of employees focused - Labor force: retention rate, - Focused industry expertise on a particular function/industry quality of training - Global Locations in 11 - Experience level (e.g.: Dollars - R&D Services: Reduced cost, countries and supports all of procurement transactions increased speed to market, languages managed each year) improved performance - Standardized, global services - Engineering Services: 800 - 16 global F&A centers Engineers & 42,000 consultants - 5 global HR centers: Bangalore, in India Dalian, Mumbai, & San Antonio - BPO Center in Bangalore: - 40 global locations, 11 - Life sciences R&D centers: Global Research Center, countries, 40+ languages India, China, Philippines, & Analytics, F&A Operations, Data Europe Management, Procurement Operations - Leverages Bangalore because of availability of talent and concentration of other BPO facilities in the city
-Engineering Services: reduced cost and improved agility Higher quality of services, Over 8000 engineers to support - Consulting Services: worldwide scale, and localized the entire lifecycle of offering commitment to clients, expertise expertise, and global network of innovation and delivery centers
- BPO: Reduces costs - Speeds up time to market
- Talented employees (well - Engineering Services: faster to trained) market, faster innovation, - Analytics capabilities and improves operational analytics driven methodologies efficiencies - Geographic breadth
- 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) 41 Global Delivery Centers: USA, - Other services in India, Canada, Uruguay, Brazil, Thailand, Mexico, US, Canada, throughout East & West EU, Singapore, Argentina, Uruguay, India, Africa, India, throughout Brazil, Chile, Columbia, Ecuador, Asia, and Australia Peru
More packaged solution marketing than any other company that was investigated
88 Sources: 1. Accenture.com; 2. Capgemini.com; 3. Wipro.com; 4. Infosys.com; 5. TCS.com; 6. IBM.com Copyright Š 2015 by ScottMadden, Inc. All rights reserved.
- Very IT focused and business process focused compared to the other companies
Appendix E: Responses to Promote Iceland’s Questions
Appendix E: Responses to Promote Iceland’s Questions
Promote Iceland’s Follow-Up Questions 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
90
Sources: PWC Tax Summaries, salaryexplorer.com
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Appendix E: Responses to Promote Iceland’s Questions
Question 1: Arguments for Recommendations? Question 1: Can you lay out the arguments for the recommendations provided on slide 30? Recommendation
Rationale
Focus on Icelandic companies as shared services providers
Develop complex, low-transaction, niche services
Target niche clients
Recruiting foreign shared services companies will be challenging – focus on developing local, Icelandic companies
Target small-to-medium scale shared services providers
Target small-to-medium sized clients for shared services offerings
91
Sources: PWC Tax Summaries, salaryexplorer.com
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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 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 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 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) Iceland’s labor supply is very limited compared to the recruitment needs of a large-scale shared services operation 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
Appendix E: Responses to Promote Iceland’s Questions
Question 2: Nordic Countries with Shared Services? 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
The Nordic countries have attracted shared services and FDI investment – primarily in IT services. IT labor supply is supporting this development 92 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Sources: Fugro.com, LinkedIn, newsinenglish.com, runway.com, EY, HCLtech.com, Deloitte 2013 Shared Services Survey
Appendix E: Responses to Promote Iceland’s Questions
Question 3: Iceland Competitive with Nordic Countries? 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? 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.
93
Sources: PWC Tax Summaries, salaryexplorer.com
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Appendix E: Responses to Promote Iceland’s Questions
Question 4: Impact of Free Flow of Labor in EU? 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? 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
94 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Appendix E: Responses to Promote Iceland’s Questions
Question 5: Impact of Expat Legislation in Iceland? 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? 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
95
Sources: United Nations Education, Scientific, and Cultural Organization
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Appendix E: Responses to Promote Iceland’s Questions
Question 6: Impact of Iceland’s Location? Question 6: How important is Iceland’s location on the globe in regards to shared services opportunities? 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
From what countries are shared services centers supporting India and Russia?
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 Results
Source: Google Maps
96 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Source: Deloitte 2013 Global Shared Services Survey Results
Appendix F: How to Improve Iceland’s Competitiveness
Appendix F: Promote Iceland’s Support of Local Industries
Improving Iceland’s Competitiveness for Shared Services Recommendation
Rationale
Increase tertiary graduates in computer science, information technology, and engineering
Ease Expat and immigration restrictions
Promote quality of living and geological stability of Iceland
98 Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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 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
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
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.
100 Copyright © 2015 by ScottMadden, Inc. All rights reserved.