Business process offshoring in Poland Opportunities for the Polish companies and the economy

1. Business process offshoring in Poland Opportunities for the Polish companies and the economy Mariusz-Jan Radło, Ph.D. ========================= SEENDICATE, co-founder and partner Warsaw School of Economics, associate professor

2. Outline • Fragmentation, offshoring, outsourcing, BPO… • What to outsource and why? • BPO in Poland • Outsourcing and the economy • How to gain from outsourcing

3. Fragmentation of economic activities… Fragmentation … splitting of production processes into separate parts that can be done in different locations, including in different countries Other terms describing the same processes: Delocalization, Disintegration, Internationalization, Intra-mediate trade, Intra-product specialization, Multistage production, Outsourcing, Slicing up the value chain (Jones and Kierzkowski, 1990)

4. Offshoring and outsourcing:dimensions and mechanisms Source: OECD (2007) and UNCTAD (2004)

5. Offshoring in the strict sense:offshore in-house sourcing • Reduction of the production units in the home country • Opening of affiliates or production units abroad (which produce the same goods and services) • Import of goods or services from the its affiliates abroad Source: OECD (2007)

6. Offshore outsourcing:subcontracting abroad • Reduction of the production units in the home country • Finding subcontractor or supplier abroad for a given production • Import of goods or services from the foreign subcontractors Source: OECD (2007)

7. What is business process offshoring and outsourcung? BPO is the process of hiring another company (creating an affiliate) to handle business activities for you • In the early days, BPO usually consisted of outsourcing processes such as payroll. Then it grew to include employee benefits management. Now it encompasses a number of functions that are considered "non-core" to the primary business strategy. • Now it is common for organizations to outsource financial and administration (F&A) processes, human resources (HR) functions, call center and customer service activities and accounting and payroll. • An offshoot of BPO is KPO -- knowledge process outsourcing. Considered by some to be a subset of BPO, KPO includes those activities that require greater skill, knowledge, education and expertise to handle. The current definition of KPO encompasses R&D, product development and legal e-discovery, as well as a number of other business functions. Source: sourcingmag.com

8. Waves of global offshoring and outsourcing • First generation outsourcing refers to contractual arrangements confined to the procurementof non-core competences. • Since the mid 1980s, a new form of outsourcing practice emerged: firms started tooutsource their near-core activities. • Third generation outsourcing appears to be driven by heated competition in industrieswhere the technological platform — core proprietary elements — is standardised, butnovel technological features emerge constantly and rapidly. Source: De Vita and Wang, 2006

9. Waves of global offshoring and outsourcing Source: De Vita and Wang, 2006

10. Material outsourcing Outsourcing intensity Imported intermediate manufacturing inputs (share in total non-energy inputs) in the United Kingdom. Source: Amti and Wei (2004)

11. Services outsourcing Outsourcing intensity Imported intermediate services inputs (share in total non-energy inputs) in the United Kingdom. Source: Amti and Wei (2004)

12. What is outsourced? * Customer services, food processing, cleaning, etc. Source: Halvey and Melby, 2007

13. Why to outsource? • Cost savings • Acquiring third-party expertise • Increased market flexibility • Improved scalability • Reduced time to market Source: Deloitte, 2008. Source: Halvey and Melby, 2007 Source: ATK, 2003.

14. Case: Restructuring in Danish textile and clothing industry. Outsourcing was one of major factor influencing restructuring processes in the Danish textile industry. It resulted in: • the decrease of employment in the textile and clothing sectors by 80% was due to outsourcing • But... most of of persons undertook new jobs (in the same or other sectors). • ... and thanks to structural changes and outsourcing of less complicated and less efficient production abroad in the textile and clothing sectors, the labor productivity in the mentioned period had risen considerably Olsen, Ibsen and Westergaard-Nielsen (2004)

15. Offshore Location Attractiveness AT Kearney Among other 40 countries Poland ranked at 16th position in 2007 in comparison to 18th in 2005 - as the most attractive location for offshoring projects. Source: ATK, 2007 ………………………………….

16. Inflow of FDI related to BPO projects(Poland, 1996-2007)

17. Gdańsk Olsztyn Szczecin Bydgoszcz Warszawa Poznań Łódź Lublin Wrocław Katowice Kraków BPO in Poland – locations PRIMARY LOCATIONS biggest academic centres, best communication infrastructure, high saturation of foreign companies, simmilar wages (5% – 10 % differences), high costs of livings, deepest HR pool, top class infrastructure, best quality of life SECONDARY LOCATIONS big academic centres, underrated, smaller saturation of foreign investments, lower wages, lower costs of living, good / very good quality of live OTHER smaller academic centres, underrated, very low saturation of foreign investments, lower wages, lower costs of living, lack of office space, low communication infrastructure

18. F&A and IT Centres in Poland (eg.) Zensar Reuters Olsztyn Gdańsk SAP ThomsonTNT ExpressTranscom ABN AMROAccenture AVONCiti Group Dimar Euroconex / NOVAHewlett-PackardSitelPage ComputersTchiboCTM Teleperformance Bydgoszcz Arvato Services GlaxoSmithKline Microsoft MAN Carlsberg Franklin Templeton Poznań Warszawa AccentureCiti Group General ElectricTransition Technologies Infosys Teleca SAP IBM HP Volvo Google Credit Suisse UPS GE/Genpact KPIT Cummins QAD Łódź Wrocław AHOLDACSBayer ElectroluxExult/Hewitt HCL Tech IBMKPMGLufthansaCapgeminiCommunication Factory Philip MorrisRR DonelleyShell Capgemini Kroll Katowice Kraków

19. BPO locations in Poland and attractiveness factors Remarks: * D – domestic, E – European, O – overseas, ** rough data (estimate PAIIZ), ***Tricity – Gdansk, Gdynia and Sopot. Source: PAIIZ (2008) and Jones Lang LaSalle (2007).

20. other 14 cities Offshoring sector in Poland Ca. 17 000 employees in 100 centres. Top 3 cities: 1. Warsaw 2. Cracow 3. Wroclaw Source: PAIIZ, 2008 and DIS, IT Monitor 2007

21. Positive effects of outsourcing • Growth in consumers’ incomes • Improved competitiveness and productivity in enterprises • Export growth • Control of inflation • Better returns on capital Source: OECD, 2007

22. Negative effects of outsourcing • Fall in real wages of certain categories of workers • Deterioration in the terms of trade • Possible decline in capacity for innovation • Loss of tax revenues • Regional effects Source: OECD, 2007

23. How to gain from outsourcing? • Modernize social and employment regulation • Design measures targeted at specific categories of workers • Adapt the educational system to better reflect the needs of the changing labor market • Help ease the plight of workers displaced by delocalization Source: McKinsey (2005)

24. Conclusions • Take advantage of the current wave of relocation at both macro- and micro-/company level • Be prepared for changes in your company • Adjust economic policy to the above

25. Thank you !!! www.seendicate.pl www.offshoring.edu.pl