Poland has long enjoyed its position as the top outsourcing destination in Europe. Where is the BPO sector headed now and can it drive growth in emerging office markets?
by Beata Socha
The business service industry has been Poland’s greatest economic driver over the past years. It is one of the reasons why the country did not experience negative growth during the recent crisis. Nearly 20,000 new jobs were created in the sector over the past year. Between early 2012 and April 2014, employment in outsourcing increased by more that 50 percent, from 83,000 to 128,000, according to a recent report by the Association of Business Service Leaders.
Forecasts remain very encouraging. Given that the average annual growth in the BPO sector in the last decade has been at 20 percent, it is reasonable to expect employment in the industry to reach between 150,000 and 170,000 by the end of next year and to continue growing beyond 2015. “I think we can potentially get to 200,000 jobs over the next three to five years,” said Jacek Levernes, co-founder and president of the ABSL in Poland and board member of HP for EMEA.
Shared service centers (SSCs) are still the dominant form of outsourcing in Poland. There are already 160 SSCs across the country, altogether employing 45,000 people. Poland also has 100 BPO centers and almost 120 R&D centers. The fourth most common service being outsourced to Poland is IT, with nearly 80 ITO hubs.
Firms looking for savings in Poland span across all sectors. The more competitive the industry, the more important shaving off a few percent of the overhead is.
“If you look at the history of shared services, outsourcing and offshoring, it started with IT companies, like HP and IBM. Then came FMCG companies like Coca Cola and Procter and Gamble. Why FMCG? Because their margins were very thin and they were looking to save money,” Levernes explained.
It seems that pharma, faced with a recent onslaught of competition from generic drug producers, is the next big thing in the outsourcing business. “Before, their margins were so large that saving 2-3 percent of the P&L didn’t mean much. Now it’s starting to mean something, so much so that companies like Merck and Bayer are starting to look into this,” Levernes added.
Last year, Bayer moved its finance and accounting SSC, servicing over 20 European countries, to Gdańsk. Recently, another German pharma giant, Merck, decided to open an HR center in Wrocław, initially employing a few dozen people. The company said it will continue its recruitment process into 2015.
Moving up the chain
Although call centers, HR and accounting services still seem to be the top three services that companies are likely to outsource, there is currently a visible increase in higher-level services being transferred to Polish centers. “Probably there’s scope for Poland to grab more R&D, with a bit of government help and the right direction,” said Alan Colquhoun, head of DTZ for the CEE region.
There is also another major sector that Poland would gladly tap into – fund management. “There are a lot of people who have developed their skills working on basic-level financial services and can be used for fund management. And there is a lot of potential in that route, but it would require legal changes to ensure tax transparency,” said Tomasz Trzósło, managing director of JLL in Poland.
These changes could create up to 100,000 new workplaces over the next 3-7 years. “We are currently working together with the Economic Council and the Ministry of Finance on ways to change regulations so that we can start competing with Ireland and Luxembourg in the fund management industry, which offers as many as 400,000 jobs in these two countries,” said Levernes.
A cornered market
Poland’s position as Europe’s no. 1 outsourcing destination results not only from lower labor costs and a high supply of skilled workforce, but also from its size, which guarantees stable costs over a longer period. “Poland is too big of a country for the wage levels to change rapidly,” said JLL’s Trzósło. “Although there continues to be wage pressure, the constant influx of talented, educated people from smaller to larger cities keep labor costs competitive,” he added.
The top ten outsourcing cities in Poland (Kraków, Warsaw, Wrocław, Tri-City, Łódź, the Katowice agglomeration, Poznań, Bydgoszcz, Szczecin and Lublin) have thus far dominated the market, with 95 percent of all BPO/SSC employment located there. International business service companies have leased over 220,000 sqm of office space in 2013, the majority of which was located in Poland’s regional cities. “Altogether, outside the capital, the share of total demand of BPOs/ITOs/SSCs/R&Ds amounted to about 50 percent,” the ABSL report said.
Are companies in the BPO sector interested in looking for lower costs also in other, smaller cities? JLL’s recent report identified eight emerging office markets that could become major outsourcing destinations: Białystok, Bydgoszcz, Kielce, Olsztyn, Opole, Radom, Rzeszów and Toruń.
On the one hand, third-tier cities do have advantages, including lower employee turnover, as their labor markets have higher unemployment levels than major cities. On the other hand, even with all the qualified graduates they churn out each year, the labor pool they offer may be insufficient for major companies to find the people they need.
“If you’re setting up a BPO and you need a couple hundred people in phase one, it’s difficult to get them in one hit as the labor supply gets tighter,” said DTZ’s Colquhoun.
Same old story
Office space poses an even bigger problem. The old chicken-and-egg, a.k.a. the office-or-tenant issue, has been a major barrier for these cities. If there is no space to lease, no company will even look at a city as a possible investment location, and if there are no tenants, developers won’t be able to secure the necessary financing to launch development.
Lublin, a city in eastern Poland, managed to get its foot in the door and attract several major BPO players, including Sii, Mobica and Solers. “We were at an advantage in Lublin, because the first modern office space began to emerge 12 years ago, thanks to the activity of a local developer called Centrum Zana,” said Mariusz Sagan, director of the city’s strategy and investor assistance department. Now, Lublin is one of top ten outsourcing destinations in Poland and is preparing for another wave of investors. “We have recently sold a piece of land, where an old bus depot was located, to a developer set to build 100,000 sqm of offices by 2020. We believe the investment will help create another 10,000 jobs in this part of the city, bringing Lublin’s BPO sector up to par with that of Łódź, a city twice as populous,” Sagan added.
Truth be told, the eight cities under the microscope are no barren wastelands either. There is some office space already available and more is set to come. “Modern office space in the eight cities analyzed by JLL, totals more than 321,500 sqm and is comparable to volume in Poznań or Katowice. This currently represents 4.4 percent of the entire available office stock in Poland,” JLL report reads. Currently, almost 50,300 sqm is under construction in these locations, with the majority in Rzeszów (19,700 sqm), Olsztyn (11,900 sqm) and Bydgoszcz (9,800 sqm). An additional 194,400 sqm is in the pipeline, representing a 70 percent increase compared to Q2 2012.
Still, a total of 300,000 sqm of office space in eight cities is far from impressive. And if these locations are as attractive as they are made out to be, why aren’t developers more interested in building there?
“One thing to bear in mind is that in order to make it a success, almost all developers need to have an exit route. Once they’ve built, they need to sell it,” said DTZ’s Colquhoun. However, investors active in Poland’s office market, predominantly German, British and American institutional investors, are too risk-averse to look at such cities as possible targets.
“One of the problems with the Polish commercial property investment market is that 90 percent of the turnover is due to international investors and many of these funds invest to gain exposure to Poland. Therefore, their default position is to buy prime properties,” said Ben Habib, CEO of First Property Group, which has thus far invested some €300 million in Poland. “They generally will not be looking for risk, they are looking to buy safe properties in their chosen geographies,” he added.
If international investors see third-tier cities as too risky, who else is there? “What would help these cities, apart from a proactive local authority supporting the planning process, would be a loosening of the investment legal framework, allowing Polish pension funds to invest directly in real estate,” Colquhoun explained.
Local institutional investors would be an ideal solution to the problem, as their perception of risk is different from that of global players. They “would be much more likely to buy an 8,000-sqm or a 15,000-sqm office building in Kielce or Ostrów Wielkopolski,” he added.