iceland as a shared services destination
DESCRIPTION
Study of Iceland’s Suitability and AdvantagesTRANSCRIPT
Copyright © 2015 ScottMadden, Inc. All rights reserved. Report _2015
Iceland as a Shared Services Destination
Study of Iceland’s Suitability and Advantages
Phase I – Report
June 24, 2015
0
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
1
ContentsProject Overview: Phase 1 Page
Project Objectives 3
Key Findings 4
Key Recommendations 5
ScottMadden’s Approach 6
Roles and Responsibilities 7
Tasks and Schedule 8
Shared Services Overview
What Is Shared Services? 10
Why Companies Offshore Their SSCs 11
Doing Business In Iceland
SWOT Analysis 13
Iceland Location Assessment: Strengths and Weaknesses 14
Reykjavik’s Competitiveness 15
Shared Services Providers and Outsourcers in Iceland 16
Quality of Life in Iceland 17
Shared Services and Outsourcing Business Cases Page
Business Case 1: Icelandic Company, New SSC 20
Business Case 2: Foreign Company, New SSC 22
Business Case 3: Icelandic Company, New R&D Center 24
Business Case Outcomes Summary and Overall Takeaways 26
Summary and Recommendations for Shared Services in Iceland
Research Summary and Takeaways 28
Opportunities for Shared Services and Outsourcing in Iceland 29
Recommendations 30
Appendices
Appendix A: Detailed Location Criteria Assessments 31
Appendix B: Business Case Scenarios (Detailed) 49
Appendix C: Summary of Interviews/External Business Contacts 81
Appendix D: SSC Outsource Providers Marketing Assessment 87
Appendix E: Responses to Promote Iceland’s Questions 90
Appendix F: How to Improve Iceland’s Competitiveness 97
Appendix G: Promote Iceland’s Support of Local Industries 99
Project Overview: Phase 1
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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
Project Overview: Phase 1
3
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Key Findings
Project Overview: Phase 1
4
Iceland’s Strengths and Challenges Perspectives of Icelandic CompaniesShared Services and Outsourcing in
Iceland
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
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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Key Recommendations
Project Overview: Phase 1
5
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
6
ScottMadden’s Approach
Project Overview: Phase 1
Confirm Objectives and Work Plan
Assess Business Environment in
Iceland
Benchmark Iceland with Other Locations
Finalize Recommendations and Target Markets
■ Confirm project objectives
■ Develop tentative work plan
■ Request/review information on Iceland
■ Review marketing information from other countries/locations
■ Present plan to stakeholders
■ Refine information collection templates and interview guides
Review information and interview executives of companies operating in Iceland
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
Based on Iceland’s capabilities, develop likely external location/company criteria
Gather information on other locations for benchmark comparisons
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
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
Deliverables
■ Work plan
■ Kickoff presentation
Deliverables
Matrix of companies operating in Iceland
List of external business contacts
Tentative advantages and potential of Iceland for hosting shared services
Deliverables
Comparison of factors from Iceland and other locations
Results from selected outsourcing companies and target companies for captive shared services
Deliverables
Final report explaining advantages/disadvantages, target market characteristics, and potential branding for Iceland
Phase I Phase II
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Team Roles and Responsibilities
Project Overview: Phase 1
7
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
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
(+354) 511-4000 (office)
(+354) 824-4461 (mobile)
Arnar Gudmundsson Project Manager Support ScottMadden with Iceland
“Location Criteria” and arranging
meetings with Iceland ministries
(+354) 822-5924 (mobile)
Erna Bjornsdottir Project Manager Support ScottMadden with arranging
meetings with domestic companies and
associations
(+354) 824-4370 (mobile)
Doug Utley
Partner, ScottMadden
Engagement
Partner
Plan and manage project
Provide guidance to Provide Iceland
Develop analysis and recommendations
919-714-7631 (office)
919-349-1504 (mobile)
Mark Ladisch
Associate, ScottMadden
Consultant Assist with gathering and organizing
information
Assist with analysis
Draft deliverables
(404) 564-7366 (office)
(765) 491-6778 (mobile)
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Tasks and Schedule
Phase 1:
■ May 18–June 16, 2015
Project Overview: Phase 1
8
1 2 3 4 5 6 7 8 9 10
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
Sub-Tasks
Month 1 Month 2 Month 3
Phase
Phase I
Phase II
Major Task
Shared Services Overview
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
What Is Shared Services?
Shared Services Overview
10
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
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
Business
Unit A
Business
Unit B
Business
Unit C
Business
Unit DSSC
Business
Unit E
Business
Unit F
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 high-
transaction 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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Why Companies Offshore Their SSCs
Shared Services Overview
11
Sources:
1. “Where Will Shared Services Go Next,” Deloitte, 2014
2. “Centralized Operations,” EY, February 2014
3. “A structured Approach to Shared Services,” Infosys, 2010
5. “Setting Up an Offshore SSC,” SSON, 2012
6. “Learning from the Masters,” Accenture, 2009
Top Three Reasons Considerations Advantage Provided
Cost
Lower wages, salaries, and benefits
Lower corporate taxes
Lower real estate costs
Labor arbitrage
Talent
Larger quantity of available workers
Higher education level of workers
Lower worker turnover rate
Scalability and access to talent
Location
Alignment of time zones to operations and clients
Language needs and cultural fit
Accessibility and convenience of travel
Convenience and access to operations and clients
Doing Business in Iceland
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
SWOT Analysis*
Doing Business in Iceland
13
Strengths Weaknesses
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
High labor rates
Small labor force
Limited college graduates from IT and engineering fields
Limited economic stability
Opportunities Threats
Demand for niche market, analytical, and consultative
services
Demand for low-cost, renewable energy
Large shared services industry that can compete with
local Icelandic companies
International reputation for environmental disturbances
(volcanic eruptions)
*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.
Iceland Location Assessment: Strengths/Weaknesses
Doing Business in Iceland
14 Footnote: See Appendix A for detailed analysis.
Methodology (in brief) Summary
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
Strengths: infrastructure, political stability, and natural
disaster frequency, corporate income tax
Weaknesses: labor rates, labor supply, and economic
stability
1 2 3 4 5
Political Stability Index 1 - 100 Reykjavik - 92 Prague - 84 San Jose - 67 Miami - 66 Kuala Lumpur - 48
Crime Rate Index 0 - 7 Reykjavik - 6.3 Prague - 5.4 Kuala Lumpur - 4.9 Miami - 4.5 San Jose - 3.9
Logistics / Convenience Index 0 - 7 Reykjavik - 5.9 Miami - 5.5 Kuala Lumpur - 5.4 Prague - 4.7 San Jose - 2.9
Electricity Reliability Index 0 - 7 Reykjavik - 6.8 Prague - 6.5 Miami - 6.0 Kuala Lumpur - 5.9 San Jose - 5.5
Water Reliability Penetration Reykjavik - 100% Prague - 99.8% Kuala Lumpur - 99.6% Miami - 99.2% San Jose - 96.6%
Telephone Penetration Penetration Reykjavik - 58% Miami - 48% San Jose - 32% Prague - 21% Kuala Lumpur - 15%
Internet Penetration Penetration Reykjavik - 95% Miami - 78% Prague - 73% Kuala Lumpur - 61% San Jose - 42%
Disaster Frequency^ Index 0 - 10 Reykjavik - 1.45 Prague - 2.03 Kuala Lumpur - 3.38 San Jose - 4.85 Miami - 7.58
Tax Breaks & Incentives Index 0 - 1 Reykjavik - 0.96 Prague - 0.80 Kuala Lumpur - 0.78 San Jose - 0.38 Miami - 0.2
Real Estate Costs^ $/Sq. Ft. San Jose - $4 Reykjavik - $10 Prague - $30 Kuala Lumpur - $32 Miami - $40
Education Levels Tert. Grad % Miami - 94% Reykjavik - 81% Prague - 64% San Jose - 47% Kuala Lumpur - 37%
Language Capabilities English Fluency Miami - High Reykjavik - High Kuala Lumpur - High Prague - Moderate San Jose - Low
Ease of Doing Business^ Ranking 1 - 189 Miami - 7 Reykjavik - 12 Kuala Lumpur - 18 Prague - 44 San Jose - 83
Staff Turnover Rate^ Percentage Miami - 2.4% Prague - 12.7% Reykjavik - 13.0% San Jose - 15% Kuala Lumpur - 15.7%
Labor Costs^ Tot. Emp. Cost Kuala Lumpur - $23k Prague - $32k San Jose - $53k Reykjavik - $56k Miami - $75k
Labor Supply Index 0 - 1 Kuala Lumpur - 0.90 Miami - 0.62 Prague - 0.56 San Jose - 0.48 Reykjavik - 0.00
Economic Stability Index 0 - 7 Kuala Lumpur - 5.3 Prague - 5.2 San Jose - 4.7 Miami - 4.0 Reykjavik - 3.7
Key: Strong Neutral Weak
^ Low score is more competitive
RankingCriteria Units
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
ImportanceReykjavik's
Competitiveness
Labor Supply High Weak
Labor Costs High Weak
Education Levels High Neutral
Language Capabilities Medium Neutral
Staff Turnover Rate Medium Neutral
Political Stability Medium Strong
Economic Stability Medium Weak
Logistics / Convenience Low Strong
Ease of Doing Business Low Neutral
Real Estate / Facility Costs Low Neutral
Tax Breaks & Incentives Low Strong
Crime Rate Low Strong
Electricity Reliability Low Strong
Water Reliability Low Strong
Telephone Penetration Low Strong
Internet Penetration Low Strong
Disaster Frequency Low Strong
Cultural Acceptance Low Neutral
Criteria
Reykjavik’s Competitiveness
Doing Business in Iceland
15
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
■ 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
Sources: 1. “Global Shared Services Survey Results,” Deloitte, 2013; 2. “Services Offshoring Ranking,” Towers Watson, 2013
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Shared Services Providers and Outsourcers in Iceland
Doing Business in Iceland
16
Icelandair Advania
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
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
Shared Services Providers Iceland Customers of Shared Services Captive SSCs
Advania (IT)
Attendus (HR)
Icelandair (HR, F&A)
KPMG (HR, IT, F&A)
Attendus (payroll, F&A)
Icelandair (IT – helpdesk)
Meniga (F&A, software development)
Ossur (F&A)
Skipti/Siminn (Communications, legal,
F&A)
Icelandair (HR)
Ossur (IT)
Examples of shared services providers and outsourcers in Iceland:
Company Profiles: Examples of shared services providers in Iceland
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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.
Doing Business in Iceland
17
Shared Services and Outsourcing Business Cases
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Case 1: Icelandic Company, New SSC Case 2: Foreign Company, New SSC Case 3: Icelandic Company, New R&D Center
Sample Companies Energy Engineering, Inc. Tech Distribution, Inc. Energy Engineering, Inc.
SSC/Outsourcing Function Captive Shared Services Center Captive Shared Services Center Geothermal Energy R&D Services
Headquarters Location Reykjavik, Iceland New York, USA Reykjavik, Iceland
Number of Employees 25 100 25
Real Estate (sq. ft.)1
6,500 26,000 10,000
Real Estate Description Rent: Urban, Modern Rent: Urban, Modern 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
CategoryScenarios
Labor, Real Estate, Operations
Company Attributes
Layout of Business Cases
Shared Services and Outsourcing Business Cases
19 Source: 1. “Revisiting Office Space Standards,” Haworth, 2015
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 1: Introduction and Relevancy
Shared Services and Outsourcing Business Cases
20
Company Profile and SSC Specifications
Company*: Energy Engineering, Inc. (EEI)
Business: EPC and Engineering Consulting
Firm
Industries: Energy, Industry, and Infrastructure
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
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.
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.
*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: Findings and Takeaways
Shared Services and Outsourcing Business Cases
21
Rank City Weighted Score*
1Kuala Lumpur,
Malaysia68
2Prague, Czech
Republic62
3 Miami, United States 61
4 Reykjavik, Iceland 52
5 San Jose, Costa Rica 32
*100-point scale
Location Criteria Score
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
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
Key Assumptions:
Annual Income: $3,250,000
Discount Rate: 7.7%
Implementation Costs: Kuala Lumpur: $1,500,000
Reykjavik: $800,000
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 2: Introduction and Relevancy
Shared Services and Outsourcing Business Cases
22
Company Profile1 and SSC Specifications
Company*: Tech Distribution, Inc. (TDI)
Business: IT Equipment and Services
Headquarters Location: New York, United
States
Number of Employees: 3,000
Annual Revenues: $4,000,000,000
SSC Specifications:
26,000 square feet
100 employees
Rental space: modern, urban
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.
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.
*An invented technology distribution and services company modeled after the New York-based company Westcon Group.
Sources: 1. Inc.com/profile/Westcon-group
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.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 2: Findings and Takeaways
Shared Services and Outsourcing Business Cases
23
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
Location Criteria Score
Key Assumptions:
Annual Income: $9,000,000
Discount Rate: 7.7%
Implementation Costs: $1,500,000 (Equivalent for all cities)
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
*100-point scale
Rank City Weighted Score*
1Kuala Lumpur,
Malaysia68
2Prague, Czech
Republic62
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case 3: Introduction and Relevancy
Shared Services and Outsourcing Business Cases
24
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.
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.
Company Profile
Company*: Energy Engineering, Inc. (EEI)
Business: EPC and Engineering Consulting
Firm
Industries: Energy, Industry, and Infrastructure
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
*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: Findings and Takeaways
Shared Services and Outsourcing Business Cases
25
*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
Takeaways:
Reykjavik falls short on cost alone, but because of Reykjavik’s
significant advantage in specialized expertise, Reykjavik wins
over Prague
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
Key Assumptions:
Annual Income: $4,000,000
Discount Rate: 7.7%
Implementation Costs: Miami: $1,500,000
Reykjavik: $1,200,000
Prague: $1,500,000
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case Outcomes Summary and Overall Takeaways
Shared Services and Outsourcing Business Cases
26
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
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
Summary and Recommendations for Shared Services in Iceland
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Research Summary and Takeaways
Summary and Recommendations for Shared Services in Iceland
28
Iceland’s Strengths Iceland’s Weaknesses Iceland’s Opportunities/Threats
Talented labor force
• Well-educated
• Problem solvers
• Underemployed
Strong work ethic (culture)
Well-developed infrastructure
Low-cost, green energy
Competitive corporate income tax rate
Limited labor supply
High labor cost for transactional services
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 Perspectives of Icelandic Companies Existing SSCs in Iceland
Limited labor supply and high labor costs
hinder Iceland’s competitiveness for high
transaction SSCs
Icelandic firms more likely to keep SSC in
Iceland than foreign firms to move to
Iceland
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:
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Opportunities for Shared Services and Outsourcing in Iceland
Summary and Recommendations for Shared Services in Iceland
29
Core Competency:
Fisheries and Marine Transportation
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
Strengths for Iceland:
Local market demand for services
Strong expertise in fisheries and global
transportation
Challenges for Iceland:
Limited supply of college graduates with
relevant degrees for shared services
roles
Core Competency:
Geothermal/Hydro Power
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 for services
Low-cost, renewable energy
Well-educated labor force
Expertise in renewable power
Challenges for Iceland:
Limited supply of engineers and college
graduates with relevant degrees for
shared services roles
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.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Recommendations
Summary and Recommendations for Shared Services in Iceland
30
Where to Focus
Where to Focus:
Geography:
Icelandic companies as shared services providers
• Attracting foreign SSCs to Iceland will be difficult due
to labor supply and labor rates
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
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
Where Not to Focus
Recruitment of foreign companies to Iceland to establish
SSCs
• First, build more success stories with local Icelandic
companies to help bolster reputation
Large shared services providers
• Labor supply is too limited for the required scale of
operations
Large businesses as clients
• Labor supply is limited for needed scalability
• Cost pressures and competition may be greater with
larger clients
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
1 2
3
Appendix A: Detailed Location Criteria Assessments
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Location Criteria and SSC Descriptions
Appendix A: Detailed Location Criteria Assessment
32
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
Crime rate Crimes and rates of crime in various
locations
Labor Supply/Quality 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 Cities served by airport
Availability of flights by destination
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Location Criteria and SSC Descriptions (Cont’d)
Appendix A: Detailed Location Criteria Assessment
33
Criteria Criteria
Infrastructure Other
Power and water reliability Sources of power and water Ease-of-doing-business index1 Index that evaluates the factors
considered when starting, operating, or
discontinuing a business
Telecom/internet reliability Telephone access (landlines and
cell phone accounts)
Internet access (internet
accounts)
Broadband providers and
available bandwidths
Natural disaster frequency History, frequency of volcanic
activity and other natural threats
Options for business
continuity/disaster response
1Ease-of-doing-business 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.
SSC Type Work Description
Tier 1 Transactional services (call center, payroll processing)
Tier 2 Complex services (analytical and consultative services)
SSC Descriptions:
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Labor Costs
Appendix A: Detailed Location Criteria Assessment
34
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Wages/Salaries $47,439 $20,636 $23,873 $23,873 $57,305
Mandatory Emp. Contribution (%) 18% 14% 34% 28% 32%
Total Employer Cost* $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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Real Estate Facility Costs
Appendix A: Detailed Location Criteria Assessment
35
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.
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Real Estate Cost $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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Tax Breaks and Incentives
Appendix A: Detailed Location Criteria Assessment
36
Tax Breaks and Incentives Assessment:
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.
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
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
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
Takeaways:
Reykjavik has the second most competitive
tax structure behind Kuala Lumpur
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Education Levels
Appendix A: Detailed Location Criteria Assessment
37
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 high-
level 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.
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
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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Labor Supply
Appendix A: Detailed Location Criteria Assessment
38
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.
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*
Total Labor Force (‘000s) 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%
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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Language Capabilities
Appendix A: Detailed Location Criteria Assessment
39
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.
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%
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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Local Turnover Rates
Appendix A: Detailed Location Criteria Assessment
40
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Annual Quit Rate 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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Political Stability
Appendix A: Detailed Location Criteria Assessment
41
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.
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Political Stability 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
Key Findings:
Rated the highest amongst the benchmark
cities
Takeaways:
Reykjavik has a comparatively high
government effectiveness
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Economic Stability
Appendix A: Detailed Location Criteria Assessment
42
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.
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Economic Stability 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
Key Findings:
Reykjavik rated the lowest of the
benchmark countries
IMF debt load and labor wage disputes
among the concerns for continued
economic stability
Takeaways:
Economic stability has been improving;
however, the economic environment in
Reykjavik is currently a weakness
compared to the benchmark countries
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Crime Rate
Appendix A: Detailed Location Criteria Assessment
43
Crime Rate Assessment:
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.
Reykjavik Kuala Lumpur* Prague San Jose Miami
Homicide Rate 1 70 18 55 69
Business Costs of
Crime and
Violence
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
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
Takeaways:
Low crime rate and low cost of crime in
Reykjavik is an advantage compared to the
benchmark countries
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Logistics/Convenience
Appendix A: Detailed Location Criteria Assessment
44
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.
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Quality of Infrastructure Index 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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Power and Water Reliability
Appendix A: Detailed Location Criteria Assessment
45
Power and Water Reliability Assessment:
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.
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Quality of Electric Supply 6.8 5.9 6.5 5.5 6.0
Access to Clean Water (%) 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
Key Findings:
100% of the population of Reykjavik has
access to clean water
Reykjavik has the highest rated electric
supply of the benchmark countries
Takeaways:
The accessibility and reliability of the water
and electric supply is a strength for
Reykjavik
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Telecom and Internet Reliability
Appendix A: Detailed Location Criteria Assessment
46
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.
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
Footnote:
Fixed Telephone Lines: Count of number of lines per 100 people
Source: Global Competitiveness Report 2012–2013 – World Economic Forum
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Natural Disaster Frequency
Appendix A: Detailed Location Criteria Assessment
47
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.
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Natural Disaster Frequency 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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Iceland Location Assessment: Ease of Doing Business
Appendix A: Detailed Location Criteria Assessment
48
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.
Reykjavik Kuala Lumpur Prague San Jose Miami
Natural Disaster Frequency 12 18 44 83 7
Footnote:
Ease of Doing Business rankings from 1–189 (1 = best, 189 = worst)
Source: World Bank Group
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
Takeaways:
Reykjavik has a supportive environment for
new and operating businesses
Appendix B: Business Case Scenarios (Detailed)
Business Case 1: Icelandic Company Developing a SSC
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Introduction and Relevancy
Business Case 1: Icelandic Company Developing a SSC
51
Company Profile
Company*: Energy Engineering, Inc. (EEI)
Business: EPC and Engineering Consulting
Firm
Industries: Energy, Industry, and Infrastructure
Headquarters Location: Reykjavik, Iceland
Number of Employees: 400
Annual Revenues: $37,000,000
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.
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.
*An invented Engineering, Procurement, and Construction (EPC) company and energy engineering consultancy modeled after the Icelandic
company Mannvit.
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.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Service Center Description and Location Selection Criteria
Business Case 1: Icelandic Company Developing a SSC
52
SSC Specifications
Facility Size: 6,500 square feet
.
Number of On-site Employees: 25
Building Requirements:
Modern space
Rental Space
Urban environment
The weights suggest that critical location characteristics for the SSC are labor costs, labor supply, and
labor quality.
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
ScoreNormalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
Score
4.0% Political Stability 92 100.00 4.00 48 0.00 0.00 67 43.18 1.73 66 40.91 1.64 84 81.82 3.27
4.0% Economic Stability 3.7 0.00 0.00 5.3 100.00 4.00 4.7 62.50 2.50 4 18.75 0.75 5.2 93.75 3.75
2.0% Crime Rate 6.3 100.00 2.00 4.9 41.67 0.83 3.9 0.00 0.00 4.5 25.00 0.50 5.4 62.50 1.25
14.0% Labor Costs^ 56452 46.89 6.56 23576 100.00 14.00 53926 50.97 7.14 85480 0.00 0.00 32539 85.52 11.97
2.0% Real Estate / Facility Costs^ 10.20 83.04 1.66 31.76 22.96 0.46 4.11 100.00 2.00 40.00 0.00 0.00 29.76 28.54 0.57
2.0% Tax Breaks & Incentives 0.96 100.00 2.00 0.78 75.61 1.51 0.38 23.54 0.47 0.20 0.00 0.00 0.80 78.66 1.57
12.0% Education Levels 0.81 77.36 9.28 0.37 0.00 0.00 0.47 16.72 2.01 0.94 100.00 12.00 0.64 47.26 5.67
28.0% Labor Supply 0.00 0.00 0.00 0.90 100.00 28.00 0.48 53.57 15.00 0.62 69.41 19.43 0.56 61.87 17.32
8.0% Language Capabilities 2.00 100.00 8.00 2.00 100.00 8.00 0.00 0.00 0.00 2.00 100.00 8.00 1.00 50.00 4.00
6.0% Staff Turnover Rate 0.13 20.30 1.22 0.16 0.00 0.00 0.15 5.26 0.32 0.02 100.00 6.00 0.13 22.93 1.38
2.0% Cultural Acceptance 3.00 100.00 2.00 2 66.67 1.33 0 0.00 0.00 3 100.00 2.00 1 33.33 0.67
3.0% Logistics / Convenience 5.87 100.00 3.00 5.43 85.24 2.56 2.88 0.00 0.00 5.48 86.91 2.61 4.73 61.84 1.86
2.0% Electricity Reliability 6.80 100.00 2.00 5.90 30.77 0.62 5.50 0.00 0.00 6.00 38.46 0.77 6.50 76.92 1.54
2.0% Water Reliability 100.00 100.00 2.00 99.60 88.24 1.76 96.60 0.00 0.00 99.20 76.47 1.53 99.80 94.12 1.88
2.0% Telephone Penetration 58.40 100.00 2.00 14.70 0.00 0.00 31.50 38.44 0.77 47.90 75.97 1.52 20.90 14.19 0.28
2.0% Internet Penetration 0.95 100.00 2.00 0.61 35.73 0.71 0.42 0.00 0.00 0.78 67.67 1.35 0.73 58.41 1.17
2.0% Disaster Frequency^ 1.45 100.00 2.00 3.38 68.52 1.37 4.85 44.54 0.89 7.58 0.00 0.00 2.03 90.54 1.81
3.0% Ease of Doing Business 12 93.42 2.80 18 85.53 2.57 83 0.00 0.00 7 100.00 3.00 44 51.32 1.54
52.53 67.73 32.82 61.10 61.51
Other
Overall Weighted Score
Prague, Czech Republic
Geopolitical
Costs
Labor Supply / Quality
Cultural
Infrastructure
Weights* Criteria
Reykjavik, Iceland Kuala Lumpur, Malaysia San Jose, Costa Rica Miami, United States
Location Selection Criteria Scoring Sheet
Business Case 1: Icelandic Company Developing a SSC
53
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.
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.”
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Initial City Selection – Location Criteria Scores
Completed quantitative analysis on the five selected cities:
Business Case 1: Icelandic Company Developing a SSC
54
Kuala Lumpur has the best fit with EEI’s location selection criteria.
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Financial Evaluation: Inputs and Assumptions
Business Case 1: Icelandic Company Developing a SSC
55
Inputs and Assumptions Description
Annual Total Cost per Employee Kuala Lumpur: $23,576
Reykjavik: $56,452
Real Estate Costs ($/sq. ft.) Kuala Lumpur: $31.76
Reykjavik: $10.20
Annual Travel Costs from HQ (15 Round Trips – Airfare)1
(Business Class)
Kuala Lumpur: $135,000
Reykjavik: $0
Corporate Tax Rate (Income Tax and VAT) Kuala Lumpur: 25.0%
Reykjavik: 20.0%
Average Staff Turnover Rate (for SSC roles) Kuala Lumpur: 15.7%
Reykjavik: 13.0%
Annual Expatriate Employee Cost2
(3 expatriates at 2 X Icelandic employee cost)
Kuala Lumpur: $338,712
Reykjavik: $0
Setup Costs (Assumptions for Travel, Hiring, etc.) Kuala Lumpur: $1,500,000
Reykjavik: $800,000
Revenue and Cost Growth Rate and Discount Rate3 Growth Rate: 3.0%
Discount Rate: 7.7%
Annual Revenue (Assumption) $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.
Icelandic Company - Captive SSC: Kuala Lumpur, Malaysia
0 1 2 3 4 5
2015 2016 2017 2018 2019 2020
Revenue
Income $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904
Total Revenue $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904
Taxes
Taxes
Corporate Income Tax $568,766 $585,829 $603,404 $621,506 $640,151
Value Added Tax $0 $0 $0 $0 $0
Total Taxes $0 $568,766 $585,829 $603,404 $621,506 $640,151
Recurring Costs
Labor
Salary/Wages & Employer Contrib. $928,112 $607,082 $625,294 $644,053 $663,375 $683,276
Turnover $15,700 $16,171 $16,656 $17,156 $17,670 $18,201
Real Estate / Facilities
Real Estate (Rental Property) $206,440 $212,633 $219,012 $225,583 $232,350 $239,321
Other
Management Travel $135,000 $139,050 $143,222 $147,518 $151,944 $156,502
Total Recurring Costs $1,285,252 $974,936 $1,004,184 $1,034,310 $1,065,339 $1,097,299
Implementation Costs
One-time Costs $1,500,000
Total Implementation Costs $1,500,000 $0 $0 $0 $0 $0
Total Annual Costs $2,785,252 $1,543,702 $1,590,013 $1,637,714 $1,686,845 $1,737,450
Net Cash Flow ($2,785,252) $1,706,298 $1,757,487 $1,810,211 $1,864,518 $1,920,453
-2,785,252 $1,584,306 $1,515,168 $1,449,046 $1,385,810 $1,325,334
Cumulative Cash Flow ($2,785,252) ($1,078,954) $678,533 $2,488,744 $4,353,262 $6,273,715
0 0 1 1 1 1
5-Yr Net Present Value $4,474,412
5-Year Internal Rate of Return (IRR) 64%
Payback Period (Years) 1.6
Financial Evaluation: Kuala Lumpur, Malaysia
Business Case 1: Icelandic Company Developing a SSC
56
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Icelandic Company - Captive SSC: Reykjavik, Iceland
0 1 2 3 4 5
2015 2016 2017 2018 2019 2020
Revenue
Income $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904
Total Revenue $0 $3,250,000 $3,347,500 $3,447,925 $3,551,363 $3,657,904
Taxes
Taxes
Corporate Income Tax $326,100 $335,883 $345,960 $356,338 $367,028
Value Added Tax $0 $0 $0 $0 $0
Total Taxes $0 $326,100 $335,883 $345,960 $356,338 $367,028
Recurring Costs
Labor
Salary/Wages & Employer Contrib. $1,411,300 $1,453,639 $1,497,248 $1,542,166 $1,588,431 $1,636,084
Turnover $12,700 $13,081 $13,473 $13,878 $14,294 $14,723
Real Estate / Facilities
Real Estate (Rental Property) $148,330 $152,780 $157,363 $162,084 $166,947 $171,955
Other
Management Travel $0 $0 $0 $0 $0 $0
Total Recurring Costs $1,572,330 $1,619,500 $1,668,085 $1,718,127 $1,769,671 $1,822,761
Implementation Costs
One-time Costs $800,000
Total Implementation Costs $800,000 $0 $0 $0 $0 $0
Total Annual Costs $2,372,330 $1,945,600 $2,003,968 $2,064,087 $2,126,010 $2,189,790
Net Cash Flow ($2,372,330) $1,304,400 $1,343,532 $1,383,838 $1,425,353 $1,468,114
-2,372,330 1,211,142 1,158,288 1,107,741 1,059,399 1,013,167
Cumulative Cash Flow ($2,372,330) ($1,067,930) $275,602 $1,659,440 $3,084,793 $4,552,907
0 0 1 1 1 1
5-Yr Net Present Value $3,177,408
5-Year Internal Rate of Return (IRR) 57%
Payback Period (Years) 1.8
Financial Evaluation: Reykjavik, Iceland
Business Case 1: Icelandic Company Developing a SSC
57
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Financial Evaluation Summary
Business Case 1: Icelandic Company Developing a SSC
58
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case Summary and Takeaways
Business Case 1: Icelandic Company Developing a SSC
59
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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Introduction and Relevancy
Business Case 2: Foreign Company Developing a SSC
61
Company Profile1
Company*: Tech Distribution, Inc. (TDI)
Business: IT Equipment and Services
Headquarters Location: New York, United
States
Number of Employees: 3,000
Annual Revenues: $4,000,000,000
Sources: 1. Inc.com/profile/Westcon-group
*An invented technology distribution and services company modeled after the New York-based company Westcon Group.
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.
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.
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Service Center Description and Location Selection Criteria
Business Case 2: Foreign Company Developing a SSC
62
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%
The weights suggest that the critical location characteristics for the SSC are labor costs, labor supply,
and labor quality.
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Location Selection Criteria Scoring Sheet
Business Case 2: Foreign Company Developing a SSC
63
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.
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.”
ScoreNormalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
Score
4.0% Political Stability 92 100.00 4.00 48 0.00 0.00 67 43.18 1.73 66 40.91 1.64 84 81.82 3.27
4.0% Economic Stability 3.7 0.00 0.00 5.3 100.00 4.00 4.7 62.50 2.50 4 18.75 0.75 5.2 93.75 3.75
2.0% Crime Rate 6.3 100.00 2.00 4.9 41.67 0.83 3.9 0.00 0.00 4.5 25.00 0.50 5.4 62.50 1.25
14.0% Labor Costs^ 56452 46.89 6.56 23576 100.00 14.00 53926 50.97 7.14 85480 0.00 0.00 32539 85.52 11.97
2.0% Real Estate / Facility Costs^ 10.20 83.04 1.66 31.76 22.96 0.46 4.11 100.00 2.00 40.00 0.00 0.00 29.76 28.54 0.57
2.0% Tax Breaks & Incentives 0.96 100.00 2.00 0.78 75.61 1.51 0.38 23.54 0.47 0.20 0.00 0.00 0.80 78.66 1.57
12.0% Education Levels 0.81 77.36 9.28 0.37 0.00 0.00 0.47 16.72 2.01 0.94 100.00 12.00 0.64 47.26 5.67
28.0% Labor Supply 0.00 0.00 0.00 0.90 100.00 28.00 0.48 53.57 15.00 0.62 69.41 19.43 0.56 61.87 17.32
8.0% Language Capabilities 2.00 100.00 8.00 2.00 100.00 8.00 0.00 0.00 0.00 2.00 100.00 8.00 1.00 50.00 4.00
6.0% Staff Turnover Rate 0.13 20.30 1.22 0.16 0.00 0.00 0.15 5.26 0.32 0.02 100.00 6.00 0.13 22.93 1.38
2.0% Cultural Acceptance 3.00 100.00 2.00 2 66.67 1.33 0 0.00 0.00 3 100.00 2.00 1 33.33 0.67
3.0% Logistics / Convenience 5.87 100.00 3.00 5.43 85.24 2.56 2.88 0.00 0.00 5.48 86.91 2.61 4.73 61.84 1.86
2.0% Electricity Reliability 6.80 100.00 2.00 5.90 30.77 0.62 5.50 0.00 0.00 6.00 38.46 0.77 6.50 76.92 1.54
2.0% Water Reliability 100.00 100.00 2.00 99.60 88.24 1.76 96.60 0.00 0.00 99.20 76.47 1.53 99.80 94.12 1.88
2.0% Telephone Penetration 58.40 100.00 2.00 14.70 0.00 0.00 31.50 38.44 0.77 47.90 75.97 1.52 20.90 14.19 0.28
2.0% Internet Penetration 0.95 100.00 2.00 0.61 35.73 0.71 0.42 0.00 0.00 0.78 67.67 1.35 0.73 58.41 1.17
2.0% Disaster Frequency^ 1.45 100.00 2.00 3.38 68.52 1.37 4.85 44.54 0.89 7.58 0.00 0.00 2.03 90.54 1.81
3.0% Ease of Doing Business 12 93.42 2.80 18 85.53 2.57 83 0.00 0.00 7 100.00 3.00 44 51.32 1.54
52.53 67.73 32.82 61.10 61.51
Other
Overall Weighted Score
Prague, Czech Republic
Geopolitical
Costs
Labor Supply / Quality
Cultural
Infrastructure
Weights* Criteria
Reykjavik, Iceland Kuala Lumpur, Malaysia San Jose, Costa Rica Miami, United States
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Initial City Selection – Location Criteria Scores
Completed quantitative analysis on the five selected cities:
Business Case 2: Foreign Company Developing a SSC
64
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.
*100-point scale
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Financial Assessment: Inputs and Assumptions
Business Case 2: Foreign Company Developing a SSC
65
Inputs and Assumptions Description
Annual Total Cost per Employee Kuala Lumpur: $23,576
Reykjavik: $56,452
Real Estate Costs ($/sq. ft.) Kuala Lumpur: $31.76
Reykjavik: $10.20
Annual Travel Costs from HQ (25 Round Trips – Airfare)1
(Business Class)
Kuala Lumpur: $225,000
Reykjavik: $75,000
Corporate Tax Rate (Income Tax and VAT) Kuala Lumpur: 25.0%
Reykjavik: 20.0%
Average Staff Turnover Rate (for SSC roles) Kuala Lumpur: 15.7%
Reykjavik: 13.0%
Annual Expatriate Employee Cost2
(5 expatriates at 2 X U.S. benefits cost) $854,800
Setup Costs (100 Round Trips, Hiring, etc.)1
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: 3.0%
Discount Rate: 7.7%
Annual Revenue (Assumption) $9,000,000
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.
Foreign Company - Captive SSC: Kuala Lumpur, Malaysia
0 1 2 3 4 5
2015 2016 2017 2018 2019 2020
Revenue
Income $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579
Total Revenue $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579
Taxes
Taxes
Corporate Income Tax $1,356,176 $1,396,862 $1,438,767 $1,481,930 $1,526,388
Value Added Tax $0 $0 $0 $0 $0
Total Taxes $0 $1,356,176 $1,396,862 $1,438,767 $1,481,930 $1,526,388
Recurring Costs
Labor
Salary/Wages & Employer Contrib. $3,212,400 $2,428,328 $2,501,178 $2,576,213 $2,653,500 $2,733,105
Turnover $62,800 $64,684 $66,625 $68,623 $70,682 $72,802
Real Estate / Facilities
Real Estate (Rental Property) $825,760 $850,533 $876,049 $902,330 $929,400 $957,282
Other
Management Travel $225,000 $231,750 $238,703 $245,864 $253,239 $260,837
Total Recurring Costs $4,325,960 $3,575,295 $3,682,554 $3,793,030 $3,906,821 $4,024,026
Implementation Costs
One-time Costs $1,500,000
Total Implementation Costs $1,500,000 $0 $0 $0 $0 $0
Total Annual Costs $5,825,960 $4,931,471 $5,079,415 $5,231,798 $5,388,752 $5,550,414
Net Cash Flow ($5,825,960) $4,068,529 $4,190,585 $4,316,302 $4,445,791 $4,579,165
-5,825,960 $3,777,650 $3,612,794 $3,455,133 $3,304,352 $3,160,151
Cumulative Cash Flow ($5,825,960) ($1,757,431) $2,433,154 $6,749,456 $11,195,247 $15,774,412
0 0 1 1 1 1
5-Yr Net Present Value $11,484,119
5-Year Internal Rate of Return (IRR) 72%
Payback Period (Years) 1.4
Financial Evaluation: Kuala Lumpur, Malaysia
Business Case 2: Foreign Company Developing a SSC
66
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Foreign Company - Captive SSC: Reykjavik, Iceland
0 1 2 3 4 5
2015 2016 2017 2018 2019 2020
Revenue
Income $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579
Total Revenue $0 $9,000,000 $9,270,000 $9,548,100 $9,834,543 $10,129,579
Taxes
Taxes
Corporate Income Tax $312,861 $322,247 $331,915 $341,872 $352,128
Value Added Tax $0 $0 $0 $0 $0
Total Taxes $0 $312,861 $322,247 $331,915 $341,872 $352,128
Recurring Costs
Labor
Salary/Wages & Employer Contrib. $6,500,000 $6,695,000 $6,895,850 $7,102,726 $7,315,807 $7,535,281
Turnover $50,800 $52,324 $53,894 $55,511 $57,176 $58,891
Real Estate / Facilities
Real Estate (Rental Property) $593,320 $611,120 $629,453 $648,337 $667,787 $687,820
Other
Management Travel $75,000 $77,250 $79,568 $81,955 $84,413 $86,946
Total Recurring Costs $7,219,120 $7,435,694 $7,658,764 $7,888,527 $8,125,183 $8,368,939
Implementation Costs
One-time Costs $1,500,000
Total Implementation Costs $1,500,000 $0 $0 $0 $0 $0
Total Annual Costs $8,719,120 $7,748,555 $7,981,012 $8,220,442 $8,467,055 $8,721,067
Net Cash Flow ($8,719,120) $1,251,445 $1,288,988 $1,327,658 $1,367,488 $1,408,513
-8,719,120 1,161,973 1,111,265 1,062,770 1,016,391 972,036
Cumulative Cash Flow ($8,719,120) ($7,467,675) ($6,178,686) ($4,851,028) ($3,483,540) ($2,075,028)
0 0 0 0 0 0
5-Yr Net Present Value -$3,394,686
5-Year Internal Rate of Return (IRR) 10%
Payback Period (Years) 6.4
Financial Evaluation: Reykjavik, Iceland
Business Case 2: Foreign Company Developing a SSC
67
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Optimal Location Assessment
Business Case 2: Foreign Company Developing a SSC
68
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case Summary and Takeaways
Business Case 2: Foreign Company Developing a SSC
69
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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Introduction and Relevancy
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
71
Company Profile
Company*: Energy Engineering, Inc. (EEI)
Business: EPC and Engineering Consulting
Firm
Industries: Energy, Industry, and Infrastructure
Headquarters Location: Reykjavik, Iceland
Number of Employees: 400
Annual Revenues: $37,000,000
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.
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.
*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.
Service Center Description and Location Selection Criteria
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
72
SSC Specifications
Facility Size: 10,000 square feet
.
Number of On-site Employees: 25
Building Requirements:
Modern space
Rental Space
Urban environment
The weights suggest that critical location characteristics for the R&D engineering services center are
labor quality and location (including infrastructure).
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
ScoreNormalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
ScoreScore
Normalized
Score
Weighted
Score
6.0% Political Stability 92 100.00 6.00 48 0.00 0.00 67 43.18 2.59 66 40.91 2.45 84 81.82 4.91
3.0% Economic Stability 3.7 0.00 0.00 5.3 100.00 3.00 4.7 62.50 1.88 4 18.75 0.56 5.2 93.75 2.81
2.0% Crime Rate 6.3 100.00 2.00 4.9 41.67 0.83 3.9 0.00 0.00 4.5 25.00 0.50 5.4 62.50 1.25
6.0% Labor Costs^ 56452 46.89 2.81 23576 100.00 6.00 53926 50.97 3.06 85480 0.00 0.00 32539 85.52 5.13
1.0% Real Estate / Facility Costs^ 10.20 83.04 0.83 31.76 22.96 0.23 4.11 100.00 1.00 40.00 0.00 0.00 29.76 28.54 0.29
6.0% Tax Breaks & Incentives 0.96 100.00 6.00 0.78 75.61 4.54 0.38 23.54 1.41 0.20 0.00 0.00 0.80 78.66 4.72
15.0% Education Levels 0.81 77.36 11.60 0.37 0.00 0.00 0.47 16.72 2.51 0.94 100.00 15.00 0.64 47.26 7.09
8.0% Labor Supply 0.00 0.00 0.00 0.90 100.00 8.00 0.48 53.57 4.29 0.62 69.41 5.55 0.56 61.87 4.95
8.0% Language Capabilities 2.00 100.00 8.00 2.00 100.00 8.00 0.00 0.00 0.00 2.00 100.00 8.00 1.00 50.00 4.00
10.0% Staff Turnover Rate 0.13 20.30 2.03 0.16 0.00 0.00 0.15 5.26 0.53 0.02 100.00 10.00 0.13 22.93 2.29
7.0% Cultural Acceptance 3.00 100.00 7.00 2 66.67 4.67 0 0.00 0.00 3 100.00 7.00 1 33.33 2.33
7.0% Logistics / Convenience 5.87 100.00 7.00 5.43 85.24 5.97 2.88 0.00 0.00 5.48 86.91 6.08 4.73 61.84 4.33
4.0% Electricity Reliability 6.80 100.00 4.00 5.90 30.77 1.23 5.50 0.00 0.00 6.00 38.46 1.54 6.50 76.92 3.08
4.0% Water Reliability 100.00 100.00 4.00 99.60 88.24 3.53 96.60 0.00 0.00 99.20 76.47 3.06 99.80 94.12 3.76
4.0% Telephone Penetration 58.40 100.00 4.00 14.70 0.00 0.00 31.50 38.44 1.54 47.90 75.97 3.04 20.90 14.19 0.57
5.0% Internet Penetration 0.95 100.00 5.00 0.61 35.73 1.79 0.42 0.00 0.00 0.78 67.67 3.38 0.73 58.41 2.92
2.0% Disaster Frequency^ 1.45 100.00 2.00 3.38 68.52 1.37 4.85 44.54 0.89 7.58 0.00 0.00 2.03 90.54 1.81
2.0% Ease of Doing Business^ 12 93.42 1.87 18 85.53 1.71 83 0.00 0.00 7 100.00 2.00 44 51.32 1.03
74.15 50.86 19.68 68.17 57.27
Other
Overall Weighted Score
Prague, Czech Republic
Geopolitical
Costs
Labor Supply / Quality
Cultural
Infrastructure
Weights* Criteria
Reykjavik, Iceland Kuala Lumpur, Malaysia San Jose, Costa Rica Miami, United States
Location Selection Criteria Scoring Sheet
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
73
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.
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.”
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Initial City Selection – Location Criteria Scores
Completed quantitative analysis on the five selected cities:
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
74
Reykjavik, Miami, and Prague have the best fit with EEI’s location selection criteria.
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Financial Evaluation: Inputs and Assumptions
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
75
Inputs and Assumptions Description
Annual Total Cost per Employee
Miami: $85,480
Reykjavik: $56,452
Prague: $32,539
Real Estate Costs ($/sq. ft.)
Miami: $40.00
Reykjavik: $10.20
Prague: $29.76
Annual Travel Costs from HQ (15 Round Trips –
Airfare)1
(Business Class)
Miami: $45,000
Reykjavik: $0
Prague: $10,000
Corporate Tax Rate (Income Tax and VAT)
Miami: 41.0%
Reykjavik: 20.0%
Prague: 19.0%
Average Staff Turnover Rate (for SSC roles)
Miami: 2.4%
Reykjavik: 13.0%
Prague: 12.7%
Annual Expatriate Employee Cost2
(3 expatriates at 2 X Icelandic employee cost)
Miami: $338,712
Reykjavik: $0
Prague: $338,712
Setup Costs (Assumptions for Travel, Hiring, etc.)
Miami: $1,500,000
Reykjavik: $1,200,000
Prague: $1,500,000
Revenue and Cost Growth Rate and Discount Rate3 Growth Rate: 3.0%
Discount Rate: 7.7%
Annual Revenue (Assumption) $4,000,000
Sources: 1) Kayak.com; 2) www.eca-international.com; 3) Stern.NYU.edu
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Icelandic Company Engineering R&D Center: Miami, Florida USA
0 1 2 3 4 5
2015 2016 2017 2018 2019 2020
Revenue
Income $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Total Revenue $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Taxes
Taxes
Corporate Income Tax $400,624 $412,643 $425,022 $437,772 $450,906
Value Added Tax $0 $0 $0 $0 $0
Total Taxes $0 $400,624 $412,643 $425,022 $437,772 $450,906
Recurring Costs
Labor
Salary/Wages & Employer Contrib. $2,475,712 $2,549,983 $2,626,483 $2,705,277 $2,786,436 $2,870,029
Turnover $2,400 $2,472 $2,546 $2,623 $2,701 $2,782
Real Estate / Facilities
Real Estate (Rental Property) $400,000 $412,000 $424,360 $437,091 $450,204 $463,710
Other
Management Travel $45,000 $46,350 $47,741 $49,173 $50,648 $52,167
Total Recurring Costs $2,923,112 $3,010,805 $3,101,130 $3,194,163 $3,289,988 $3,388,688
Implementation Costs
One-time Costs $1,500,000
Total Implementation Costs $1,500,000 $0 $0 $0 $0 $0
Total Annual Costs $4,423,112 $3,411,429 $3,513,772 $3,619,185 $3,727,761 $3,839,594
Net Cash Flow ($4,423,112) $588,571 $606,228 $624,415 $643,147 $662,442
-4,423,112 $550,066 $529,503 $509,708 $490,654 $472,312
Cumulative Cash Flow ($4,423,112) ($3,834,541) ($3,228,313) ($2,603,898) ($1,960,751) ($1,298,310)
0 0 0 0 0 0
5-Yr Net Present Value ($1,870,869)
5-Year Internal Rate of Return (IRR) 8%
Payback Period (Years) 6.9
Financial Evaluation: Miami, United States
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
76
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Icelandic Company Engineering R&D Center - Reykjavik, Iceland
0 1 2 3 4 5
2015 2016 2017 2018 2019 2020
Revenue
Income $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Total Revenue $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Taxes
Taxes
Corporate Income Tax $447,287 $460,705 $474,527 $488,762 $503,425
Value Added Tax $0 $0 $0 $0 $0
Total Taxes $0 $447,287 $460,705 $474,527 $488,762 $503,425
Recurring Costs
Labor
Salary/Wages & Employer Contrib. $1,411,300 $1,453,639 $1,497,248 $1,542,166 $1,588,431 $1,636,084
Turnover $12,700 $13,081 $13,473 $13,878 $14,294 $14,723
Real Estate / Facilities
Real Estate (Rental Property) $228,200 $235,046 $242,097 $249,360 $256,841 $264,546
Other
Management Travel $60,000 $61,800 $63,654 $65,564 $67,531 $69,556
Total Recurring Costs $1,712,200 $1,763,566 $1,816,473 $1,870,967 $1,927,096 $1,984,909
Implementation Costs
One-time Costs $1,500,000
Total Implementation Costs $1,500,000 $0 $0 $0 $0 $0
Total Annual Costs $3,212,200 $2,210,853 $2,277,178 $2,345,494 $2,415,859 $2,488,334
Net Cash Flow ($3,212,200) $1,789,147 $1,842,822 $1,898,106 $1,955,049 $2,013,701
-3,212,200 1,672,100 1,609,592 1,549,420 1,491,498 1,435,741
Cumulative Cash Flow ($3,212,200) ($1,423,053) $419,769 $2,317,875 $4,272,925 $6,286,625
0 0 1 1 1 1
5-Yr Net Present Value $4,546,151
5-Year Internal Rate of Return (IRR) 58%
Payback Period (Years) 1.8
Financial Evaluation: Reykjavik, Iceland
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
77
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Icelandic Company Engineering R&D Center: Prague, Czech Republic
0 1 2 3 4 5
2015 2016 2017 2018 2019 2020
Revenue
Income $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Total Revenue $0 $4,000,000 $4,120,000 $4,243,600 $4,370,908 $4,502,035
Taxes
Taxes
Corporate Income Tax $471,834 $485,989 $500,569 $515,586 $531,054
Value Added Tax $0 $0 $0 $0 $0
Total Taxes $0 $471,834 $485,989 $500,569 $515,586 $531,054
Recurring Costs
Labor
Salary/Wages & Employer Contrib. $1,152,187 $1,186,753 $1,222,355 $1,259,026 $1,296,797 $1,335,701
Turnover $12,700 $13,081 $13,473 $13,878 $14,294 $14,723
Real Estate / Facilities
Real Estate (Rental Property) $297,600 $306,528 $315,724 $325,196 $334,951 $345,000
Other
Management Travel $10,000 $10,300 $10,609 $10,927 $11,255 $11,593
Total Recurring Costs $1,472,487 $1,516,662 $1,562,161 $1,609,026 $1,657,297 $1,707,016
Implementation Costs
One-time Costs $1,500,000
Total Implementation Costs $1,500,000 $0 $0 $0 $0 $0
Total Annual Costs $2,972,487 $1,988,496 $2,048,151 $2,109,595 $2,172,883 $2,238,070
Net Cash Flow ($2,972,487) $2,011,504 $2,071,849 $2,134,005 $2,198,025 $2,263,966
-2,972,487 $1,879,910 $1,809,633 $1,741,984 $1,676,863 $1,614,176
Cumulative Cash Flow ($2,972,487) ($960,983) $1,110,866 $3,244,871 $5,442,896 $7,706,861
0 0 1 1 1 1
5-Yr Net Present Value $5,750,079
5-Year Internal Rate of Return (IRR) 70%
Payback Period (Years) 1.5
Financial Evaluation: Prague, Czech Republic
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
78
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Optimal Location Assessment
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
79
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Business Case Summary and Takeaways
Business Case 3: Icelandic Company Establishing New Engineering R&D Outsourcing Offering
80
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
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Completed Interviews/List of External Business Contacts
Appendix C: Summary of Interviews/External Business Contacts
82
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 ImplicationsMr. Gudmundsson
Mr. Bjornsdottir
Partner, Tax
Partner, TaxJune 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 June 10, 2015
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Interview Takeaways
Appendix C: Summary of Interviews/External Business Contacts
83
Company/Ministry Interviewee Title Key Takeaways
Post and Telecom
Administration
Mr. Birgisson Specialist,
Analytics
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
National Energy Authority Mr. Einarsson Senior Advisor 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
KPMG – Business
Consultant
Mr. Olafsson Project Manager,
Business
Consultancy
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
KPMG – Tax Implications Mr. Gudmundsson
Mr. Bjornsdottir
Partner, Tax
Partner, Tax
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
Attendus Ms. Jjaltadotti Partner 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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Interview Takeaways (Cont’d)
Appendix C: Summary of Interviews External Business Contacts
84
Company/Ministry Interviewee Title Key Takeaways
Icelandair Mr. Thorbergsson Senior Vice
President
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
Skipti/Siminn Mr. Oskarsson Manager
Communications
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
Ministry for Foreign
Affairs
Mr. Magnusson Director
International
Trade
Negotiations
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
Realtor Mr. Skulason 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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Interview Takeaways (Cont’d)
Appendix C: Summary of Interviews/External Business Contacts
85
Company/Ministry Interviewee Title Key Takeaways
Advania Mr. Jonsson Manager
Business
Development and
Operations
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
Hagvangur Mr. Briem Executive Search
Consultant
Provides recruiting and headhunting services
Workforce is flexible and willing to work hard
Marketing and finance professionals abundant; engineers and IT specialists
are limited
Actavis Ms. Magnusdottir Executive
Director R&D
Iceland
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
Ministry of Industry and
Innovation
Mr. Thorgrimsson Director General 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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Interview Takeaways (Cont’d)
Appendix C: Summary of Interviews/External Business Contacts
86
Company/Ministry Interviewee Title Key Takeaways
Ossur Mr. Solvason CFO 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
Meniga Mr. Ludviksson CEO 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
Kodi Mr. Thordarson 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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Marketing Assessment: SSC Outsource Providers
Appendix D: SSC Outsource Providers Marketing Assessment
88 Sources: 1. Accenture.com; 2. Capgemini.com; 3. Wipro.com; 4. Infosys.com; 5. TCS.com; 6. IBM.com
Accenture1
Capgemini2
Wipro3
Infosys4
TCS5
IBM6
Services Offered
Strategy services, digital
services, technology &
operations services (includes
BPO, shared services,
consultative services)
IT services, consulting, off-shore
engineering services,
BPO/shared services (F&A,
procurement, supply chain)
Business process services (F&A,
HR, procurement, legal,
analytics, CRM, sales &
marketing, tech solutions),
project engineering, IT services,
asset management, analytics
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)
Packaged Solutions, One-Off, Both? One-Off One-Off / Both One-Off One-Off / Both One-Off One-Off / Both
Description of Solution/Package
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
Marketing Sales Line
Global reach & scale, deep
industry expertise, long-term
experience
Expanded capabilities, top-
notch talent, and powerful
analytics
Multiple, global Fortune 500
clients
Over 8000 engineers to support
the entire lifecycle of offering
-Engineering Services: reduced
cost and improved agility
- Consulting Services:
commitment to clients,
expertise, and global network of
innovation and delivery centers
Higher quality of services,
worldwide scale, and localized
expertise
Market Discriminators
-Quantity and convenience of
locations
- Labor force: retention rate,
quality of training
- R&D Services: Reduced cost,
increased speed to market,
improved performance
- Rated as top 3 F&A provider
- Number of employees focused
on a particular function/industry
- Experience level (e.g.: Dollars
of procurement transactions
managed each year)
- Experience with large, global
clients
- Focused industry expertise
- Global Locations in 11
countries and supports all
languages
- Standardized, global services
- BPO: Reduces costs
- Speeds up time to market
- Engineering Services: faster to
market, faster innovation,
improves operational
efficiencies
- Talented employees (well
trained)
- Analytics capabilities and
analytics driven methodologies
- Geographic breadth
Where are solutions located?
- 16 global F&A centers
- 5 global HR centers: Bangalore,
Dalian, Mumbai, & San Antonio
- Life sciences R&D centers:
India, China, Philippines, &
Europe
- Engineering Services: 800
Engineers & 42,000 consultants
in India
- BPO Center in Bangalore:
Global Research Center,
Analytics, F&A Operations, Data
Management, Procurement
Operations
- 40 global locations, 11
countries, 40+ languages
- 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)
- Other services in India,
Thailand, Mexico, US, Canada,
Singapore, Argentina, Uruguay,
Brazil, Chile, Columbia, Ecuador,
Peru
41 Global Delivery Centers: USA,
Canada, Uruguay, Brazil,
throughout East & West EU,
India, Africa, India, throughout
Asia, and Australia
Comments
- Leverages Bangalore because
of availability of talent and
concentration of other BPO
facilities in the city
More packaged solution
marketing than any other
company that was investigated
- Very IT focused and business
process focused compared to
the other companies
Appendix E: Responses to Promote Iceland’s Questions
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Promote Iceland’s Follow-Up Questions
Appendix E: Responses to Promote Iceland’s Questions
90
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
Sources: PWC Tax Summaries, salaryexplorer.com
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Question 1: Arguments for Recommendations?
Appendix E: Responses to Promote Iceland’s Questions
91Sources: PWC Tax Summaries, salaryexplorer.com
Recommendation Rationale
Focus on Icelandic companies as shared services providers
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
Develop complex, low-transaction, niche services
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
Target niche clients
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
Recruiting foreign shared services companies will be challenging –
focus on developing local, Icelandic companies
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)
Target small-to-medium scale shared services providers Iceland’s labor supply is very limited compared to the recruitment
needs of a large-scale shared services operation
Target small-to-medium sized clients for shared services offerings
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
Question 1: Can you lay out the arguments for the recommendations provided on slide 30?
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Question 2: Nordic Countries with Shared Services?
Appendix E: Responses to Promote Iceland’s Questions
92
The Nordic countries have attracted shared services and FDI investment – primarily
in IT services. IT labor supply is supporting this development
Sources: Fugro.com, LinkedIn, newsinenglish.com, runway.com, EY, HCLtech.com, Deloitte 2013 Shared Services Survey
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Question 3: Iceland Competitive with Nordic Countries?
Appendix E: Responses to Promote Iceland’s Questions
93
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.
Sources: PWC Tax Summaries, salaryexplorer.com
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?
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Question 4: Impact of Free Flow of Labor in EU?
Appendix E: Responses to Promote Iceland’s Questions
94
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
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?
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Question 5: Impact of Expat Legislation in Iceland?
Appendix E: Responses to Promote Iceland’s Questions
95
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
Sources: United Nations Education, Scientific, and Cultural Organization
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?
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Question 6: Impact of Iceland’s Location?
Appendix E: Responses to Promote Iceland’s Questions
96
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
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 ResultsSource: Google Maps
Source: Deloitte 2013 Global Shared Services Survey Results
Question 6: How important is Iceland’s location on the globe in regards to shared services opportunities?
From what countries are shared services centers
supporting India and Russia?
Appendix F: How to Improve Iceland’s Competitiveness
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
Improving Iceland’s Competitiveness for Shared Services
Appendix F: Promote Iceland’s Support of Local Industries
98
Recommendation Rationale
Increase tertiary graduates in computer science, information
technology, and engineering
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
Ease Expat and immigration restrictions
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
Promote quality of living and geological stability of Iceland
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
Copyright © 2015 by ScottMadden, Inc. All rights reserved.
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.
Appendix G: Promote Iceland’s Support of Local Industries
100