Shared Service Centres and Outsourcing in the Middle East
Fluctuations in the price of oil, along with problems such as political instability and cultural differences, have previously led investors to shy away from oil-based Middle East economies. But this is changing rapidly, with a number of Gulf states encouraging the development of world-class financial infrastructures and international companies establishing shared service centres in the region. Also, banks are increasingly offering customers the ability to outsource routine processes, enabling best-in-class business practice.
The past 15 years have seen the development of highly successful international financial centres in Ireland and Belgium, placing these countries at the top table of the international financial community. Now Dubai, Qatar and Bahrain are following suit with similar sophisticated developments. Investing in the Middle East has historically brought opportunities but also misgivings. For example, in countries with predominantly oil-based economies, fluctuations in oil prices create anxiety about sustainable growth. Furthermore, political instability, cultural differences, business practices and levels of financial sophistication have often led investors to focus on more traditional markets. This is changing rapidly, with a number of Gulf states now determined to encourage international investment in oil and diversified industries and in developing world-class financial infrastructures.
The Middle East has the opportunity to fast-track the evolution of financial centres, processes and regulation, similar to that which has taken place in London, Frankfurt, Tokyo, Hong Kong and New York. Without the constraints of legacy systems, bureaucracies and received wisdom, the new financial centres have the opportunity to implement world-class financial processes. Some important trends that are influencing the markets in the Middle East are:
These trends, together with the development of international financial centres, have resulted in an increasing number of regional and international companies establishing shared service centres (SSCs) in the Middle East. SSCs enable them to centralise many of their business activities, such as treasury and working capital management, in one location for the whole region and potentially globally. An SSC can be a compelling proposition compared with maintaining local operations in each country, for the following reasons:
Critical to the success of an SSC is the assistance of a banking partner that has existing expertise of SSCs, experience in the countries in which a company operates, and the ability to advise on local regulatory issues and the best location for an SSC. Furthermore, while companies setting up operations in a new region need to adopt financial technology and engage new skills – including developing expertise in new products – they do not necessarily have the budgets or resources to do so. To address these issues, banks are increasingly offering their customers the ability to outsource routine processes such as payments and reconciliation, particularly where setting up internal processes cannot be justified, as in start-ups, small companies or companies working on specific projects in the region. Outsourcing enables these companies to take advantage of best-in-class business practices and technology without the need to make a major investment in systems and human resources.
Outsourcing can allow Middle Eastern and overseas firms, all of which are experiencing major business changes, to tap into a pool of expertise and systems-processing capability. This is particularly so where the outsourcing partner has a strong understanding of the regional regulatory environment together with local treasury and business practice expertise. Other benefits of outsourcing include:
An outsourced service needs to provide the integrity of process that a company may not be in a position to implement itself, together with services that are highly specific to the company’s needs. Banks best positioned to achieve this are those with sufficient scale to implement world-class systems and processes while having a detailed appreciation of the nuances of the local market. Below are some examples of ways in which companies in the Middle East have outsourced successfully.
Payroll is an area of business that companies throughout the world frequently choose to outsource to a third-party provider. There are some important distinctions in the Middle East that make outsourcing of payroll an attractive proposition but mean that companies providing the service need to be very familiar with the local market. For example, many companies are setting up new operations in the Middle East that are not in a position to commit long-term resources.
These companies can avoid the need to set up a payroll process by outsourcing to consultancy firms or smaller payroll companies. The consultancies and companies providing payroll services then work with a banking partner to initiate the payments and produce payroll advice to employees.
The Middle East payments market is still largely dominated by cheques, which requires regional solutions quite distinct from those in Europe where cheques are used less. Banks help companies such as finance companies to warehouse securely and present and clear post-dated cheques on time.
Prepaid (stored value) cards are becoming more popular in the Middle East. Reloadable prepaid cards can be provided to employees. Salaries can then be loaded on to the card through a simple and secure process. These preloaded cards can be used to withdraw cash from automatic teller machines or used as debit cards at points of sale at member establishments. Preloaded cards can be used for a variety of purposes – for example, payments of commissions to sales agents or for reimbursements of daily expenses paid to travelling staff.
Choosing the right partner is critical to ensuring that companies reap the maximum benefit from an outsourcing solution. Key questions to ask potential partners include:
Although about 30% of the United Arab Emirates’ gross domestic product (GDP) is based on oil and gas income, only 6% of Dubai’s GDP is related to oil and gas, with most revenue derived from tourism at Jebel Ali, the largest man-made harbour in the world, and free zones that have been established across the city – examples are the Dubai Technology, Electronic Commerce and Media Free Zone Authority (TECOM), which has attracted companies such as Microsoft, EMC, Oracle and IBM, and Dubaitech for pharmaceutical and medical research businesses.
The strategy to move from an oil-based economy to services and tourism has also resulted in a property boom with massive building projects such as Business Bay, Dubailand, Dubai Marina and Dubai Waterfront. To get an idea of scale, Dubai Waterfront will be seven times the size of Manhattan and will add 800 kilometres of man-made waterfront. Consequently, Dubai has become one of the fastest growing cities in the world.
Commercial growth in Dubai has resulted in international companies basing operations in the region, but Dubai companies are also investing overseas. For example, DP World, the shipping company based in Jebel Ali, acquired British ferry company P&O in March 2006 as part of an expansion of international interests.
It is not only local real estate that has interested investors. International real estate has also been a target for Dubai-based investors Dubai Holdings Group, which has bought hotels in Park Avenue and elsewhere in Manhattan. In 2005, the Dubai Investment Group, an affiliate of Dubai Holdings, became one of the largest residential property owners in the US with its purchase of a US$1bn portfolio of apartments in partnership with the Milestone Group.
About 60% of Qatar’s GDP and 85% of export earnings are derived from oil and gas. Natural gas reserves at 25 trillion cubic metres make Qatar the third largest producer in the world, and its aim is to quickly become the world’s top exporter of liquefied natural gas. International investment in Qatar’s oil and gas industry has been substantial – income tax at 0% has also encouraged an international community.
It is estimated that oil reserves in Qatar will last for about 23 years at current production levels. Qatar is taking a long-term view and encouraging the development of the service industry to retain its high standard of living. For example, the Qatar Science and Technology Park has been successful in attracting international technology research involving companies such as EADS, ExxonMobil, GE, Microsoft, Rolls-Royce, Shell and Total.
The Qatar Financial Centre Authority was established in March 2005 to develop and promote Qatar as a leading location for international finance through advocating international best practice and governance.
The United Nations Economic and Social Commission for Western Asia reported in January 2006 that Bahrain was the fastest growing – and most free – economy in the Middle East. Oil revenues account for about 30% of GDP and 60% of export income and Bahrain is now focused heavily on expanding into retail, tourism and heavy industry. It has developed a strong regulatory framework and is now a major banking hub for Gulf countries. More than 100 offshore banking units and representative offices are located in Bahrain, as well as 65 American firms. Many government assets – such as utilities, banks and telecoms – are being privatised, again encouraging international investment.
As with Qatar and Dubai, Bahraini companies such as venture capital business Investcorp are making a major impression internationally.