Europe’s largest economy has never fully embraced the outsourcing agenda – despite many of its largest organisations having outsourced for years. But could Germany’s domestic market be heading for a boom thanks to developments lower down the pyramid?
As the EU’s largest and strongest economy, the home of many of the world’s most prominent companies, and with a reputation for innovation and procedural excellence, it might be assumed that Germany would be playing a leading role in the ongoing outsourcing revolution. However, German business has – for a whole host of political, cultural and economic reasons – been comparatively reluctant to embrace wholeheartedly the outsourcing agenda. Whether in terms of German organisations outsourcing within or outside their country, maturity levels and the volume of work carried out remain significantly below those of the US and UK markets. For many, this has made Germany something of a promised land in terms of the sheer weight of opportunity – for German organisations and those looking to provide services to them – perennially glinting from just over the horizon.
But is this changing? Although Germany came through the crucible of the financial crisis and downturn – and, so far, the ongoing European sovereign debt tumult – in relatively good shape (helped by its status as the world’s second-largest exporter) the longer-term drivers which have made outsourcing such an important tool for businesses worldwide are just as relevant to German businesses as to any other; efficiency and effectiveness – such stereotypically German attributes – bring benefits to bottom lines the world over, and a growing proportion of organisations are now prepared at least to consider outsourcing as an element of business practice.
As is the case anywhere in the world, those who have historically spearheaded the drive towards what outsourcing does take place in Germany have been some of the country’s biggest organisations – those for whom economies of scale and the requirement to serve operations in multiple destinations make sharing services and optimising processes something akin to the archetypal “no-brainer” – and in particular banking and financial services companies. Banking BPO – already the largest slice of the pie – grew by 7.2 per cent last year according to a NelsonHall study, with insurance BPO up 8.3 per cent.
Nevertheless, to a certain extent “outsourcing” itself remains a polemic word in German society – as, indeed, in much of Europe – with added suspicion generated by the crisis resulting from what German politicians were very keen to depict as a flawed Anglo-American financial model, and by a string of several high-profile backshoring activities in the manufacturing sector attributed to product-quality issues offshore: the huge German manufacturing sector has for many years been able to capitalise on the country’s reputation for excellence, and bosses can be sensitive to the point of paranoia about the possible reputational repercussions of removing production outside the organisation.
Endeavours in back-office outsourcing have been by no means derisory – a domestic BPO market with annual growth of 7.2 per cent and a predicted 2013 volume of €14.4 billion, according to a report compiled by Germany Trade & Invest (GTAI), the German foreign trade and inward investment agency, is not to be sniffed at – but the majority view remains in favour of keeping processes captive. The aforementioned GTAI report states that approximately 75 per cent of “large” German companies have already implemented one or more shared service centres, and that a similar proportion of those which have, “would not outsource any of the processes bundled within a SSC to a third party”. Germany does indeed have a robust reputation in terms of the quality of its service centres but there is here nevertheless an indication of the importance currently given to keeping processes in-house – and one part of the explanation for why German BPO has not yet got into top gear.
But regardless of large-scale enterprises’ reticence, idiosyncrasies within Germany’s economic structure mean that the long-anticipated outsourcing deluge will only break when the country’s SME community becomes convinced of its benefits. “The German economy is not only made up of companies like Siemens and Daimler,” explains Josefine Dutschmann
of GTAI. “Rather, it is characterised by the strong role played by family-owned medium sized companies [the Mittelstand]. These companies are typically conservative when it comes to their back-office business processes.”
The Mittelstand plays a massive role within the German economy: some 70 per cent of those employed within the private sector work for one or another of the approximately three million Mittelstand companies, and approximately 80 per cent of products made by the Mittelstand go for export. Although the aforementioned conservatism is still a very strong current running through the Mittelstand, however, the need to remain competitive in an increasingly globalised market – especially against companies who are already feeling the benefits of outsourcing and, possibly, labour arbitrage – is leading to change even in such a change-resistant economic cohort.
“Germany certainly has a lot of catching up to do in the field of business process outsourcing,” says Dutschmann. “However, some rethinking has already taken place – partly due to the crisis. Medium-sized enterprises in particular are increasingly relying on service providers to make non-core processes more efficient.” Much of the Mittelstand comprises organisations big enough to see the benefits of streamlined processes and perhaps an element of deeper business transformation, but not sufficiently large to warrant the implementation of a shared service organisation. This vast swathe of potential business represents for providers the long-cherished gold at the heart of the German economic pyramid: only 19 per cent of businesses currently outsource processes, but growth has accelerated since the crisis – along with an upsurge in provider numbers and marketing activity among German and foreign sell-side companies.
Developments in the labour market, as well as global economic events, have facilitated this growth. Germany’s famously (perhaps infamously) restrictive temporary labour laws were liberalised substantially in 2004 and the ability of providers to scale headcount up and down to suit fluctuating demand has proved crucial when dealing with the greater volatility to be found when servicing such a diverse segment as the Mittelstand – especially during a comparatively tempestuous economic climate. The degree of success to which providers have both ridden out the storm and expanded their reach is reflected by a remarkable degree of choice amongst suppliers: the top 20 providers in the country combined only have a market share of some 30 per cent, according to the GTAI. (This is of course partly a reflection of linguistic realities: unlike major English-speaking economies German companies do not have access to vast offshore labour pools proficient in their own language – German proficiency in Eastern Europe has been a key driver for that area’s growth – and therefore the demand for talent with German capabilities must be satisfied domestically to a much greater extent than is the case for US or UK businesses.)
With such a diverse provider base catering to a growing domestic market it’s no surprise that foreign suppliers have long coveted German treasure – and recent events seem to suggest that the time has come for a serious assault on the fortress. The latest Indian major to secure a substantial foothold is Wipro: in August the company announced it was acquiring a Citibank captive centre in Meerbusch, a takeover which according to Wipro’s data centre outsourcing president Sameer Kishore forms “an important milestone” for the provider’s growth strategy.
“The Meerbusch facility will enable Wipro to extend its capabilities to the European market and strengthen the company’s ability to compete for global outsourcing opportunities,” Kishore said. A more ominous portent came in July when Indian IT and outsourcing association NASSCOM released a report conducted with PricewaterhouseCoopers entitled “Opportunities for the Indian IT/BPO industry in Germanic countries”, which suggested that Indian firms could secure up to $10 billion annually from the German, Swiss and Austrian outsourcing markets. The report was accompanied by the announcement by NASSCOM that it was forming a trade delegation “to provide the Indian companies an exposure to the Germanic ICT environment and provide networking opportunities”.
A solid push into the market by new entrants, and redoubled efforts by major providers already on German soil, would no doubt be a further catalyst for the expansion and maturation of the outsourcing arena in Germany – since competing to attract some of the 81 per cent of Mittelstand companies which do not currently outsource would presumably entail an upsurge in marketing and educational efforts. The extent to which labour arbitrage will play as important a role within Germany as it has for providers in the UK and US is less certain: while, as noted, Eastern Europe, for example, has enjoyed substantial benefits from German firms moving work across borders, this has been done almost exclusively by larger-scale organisations. The Mittelstand with its stronger local ties and typically more parochial outlook, may prove harder to convince; generally speaking offshoring remains somewhat anathema for German society and statements of intent such as that of Wipro securing an onshore delivery centre indicate that initially at least the next wave of German outsourcing will once again take place within the country’s borders – but perhaps rewarding those foreign providers willing to take the plunge and set up, or take over, substantial operations within the country.