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:
- A substantial growth in liquidity resulting from the recent high oil prices and major industrial developments. This creates opportunities for investment in diversified industries to stabilise future economic volatility resulting from changes to oil and gas prices and reduce dependence on hydrocarbons. New industries and large-scale investment projects have very different cash flow dynamics and risk profiles from existing oil-based businesses. Companies increasingly have to understand and manage these changing trends.
- The need for increasingly sophisticated financial management arising from the considerable rate of growth among Middle Eastern companies. In the past, family-owned groups of companies have run each company independently with their own financial management and systems. However, as companies look to make major investments, both locally and overseas, they are also looking to centralise and rationalise costs. These companies have to focus increasingly on project financing and the management of foreign exchange, risk and liquidity.
- The continuing investment by international companies in the Middle East. This is through a combination of joint ventures with local firms, which can create complex legal entity and ownership structures, and 100%-owned businesses following the introduction of free zones and technology parks.
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:
- Specialist personnel and centrally based technology create a hub of expertise, efficiency and control that would be too expensive to implement in a decentralised way.
- Banking relationships can be consolidated, enabling economies of scale for payables and receivables processing.
- Economies of scale also extend to financial activities such as borrowing, investment and foreign exchange with better rates achievable by dealing at a group or regional level.
- A service culture can be established that treats business units as internal customers with service level agreements and clear charges, encouraging high levels of accountability, transparency and quality of processing.
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.
Benefits of Outsourcing
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:
- Segregation of duties and other control mechanisms that are critical to ensuring a world-class financial operation but which smaller companies often find difficult to implement.
- Sophisticated technology on which to run the business, which would be too costly to acquire independently.
- Expertise and experience.
- Access to product solutions that can be customised for individual needs.
- Ability to respond quickly to changes in the business.
Regional Solutions
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
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.
Functions that could be included in an SSC:
- Finance and accounting
- budgeting;
- travel and entertainment;
- payroll;
- human resources.
- Treasury and working capital management
- cash and liquidity;
- payables;
- receivables;
- risk;
- reporting.
Advice for companies setting up an SSC
- Evaluate and select key partners, including banks and technology suppliers, taking into account their experience, stability, breadth of products and services, approach to customer relationships and their understanding of the business.
- Clearly document the cost benefit analysis before embarking on the project to ensure that objectives, priorities and expectations are clear.
- Obtain senior management commitment for the project to avoid the emergence of turf wars and different agendas.
- Build a detailed project plan for the implementation of an SSC and use a disciplined approach to project management. Consider all these implementation risks and how they can be mitigated.
- The business does not have to be reinvented. Consider the adoption of best internal practice as a basis for consolidated operations.
- Treat business units as customers and develop the appropriate service level agreements through the SSC.
- An SSC is a business, not simply a means to bring staff into one location – it therefore needs leadership and a commercial approach.
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.
Post-dated cheques
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.
Pay cards
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 an Outsourcing Partner
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:
- Does the company have proven processes and technology on which the outsourcing business is based?
- Does the company have experienced personnel who take time to understand the business fully?
- For international companies, is the company sufficiently global in its focus? For example, the Middle Eastern operations of a US or European company will need to comply with the governance and accounting standards of the parent region. However, does it also understand the nuances of the local market and are its solutions adapted accordingly?
- For Middle Eastern companies, does the company have expertise in all the markets in which business is now done or may be done in the future?
- What is the company’s ability to deal with changes in the business, such as new cash management requirements and cross-border activities?
- Can the company offer references from other customers?
- Is there the opportunity to meet regularly to discuss changes in the business and how the service may need to be made more flexible?
- How easy would it be to transfer the outsourced operations back?
- How regularly is the service contract reviewed?
- How committed is the company to long-term investment in the region?
Profile: Dubai
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.
Profile: Qatar
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.
Profile: Bahrain
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.