WHAT MAKES A CITY ATTRACTIVE FOR BUSINESS SERVICES CENTERS? CLUJ-NAPOCA CASE STUDY.

• Author: Surdea-Blaga, Bogdan

1. Introduction

   Whenever an economic activity or group of activities seem to grow consistently and out of proportion with the general economic activity it is worth investigating and understanding the drivers behind the growth, what are the attraction points for the companies which contribute to the growth. The formulation of a quantifiable strategy for the future such as the growth is maintained or the advantage is kept in the long run is equally important.

   Based on the figures regarding the number of employees in each sector, provided by the National Institute of Statistics (2018, indicator FOM105F), the two sectors of the economic activities which presented the largest growth in Cluj county are the ones related to Information and Communication as well as Administrative and Support Service Activities. These activities more than doubled, having growth rates of 232% and 132% respectively. The overall growth was 13%, with some sectors decreasing (negative growth rate) and others having single digits growth rates. The industrial sector, with no exception has been losing employees in the reported timeframe. Yearly figures are presented in Table 1. It is worth mentioning that the compound average growth rate (CAGR) of these sectors is above 10% and with one exception in 2010 for Administrative and Support Services, the annual growth rate has been positive.

   While the figures above refer to the entire county, the total number of employees in the city of Cluj-Napoca compared to the county is about 75% with an increasing trend towards 2015. In other words, Cluj-Napoca has three quarters of the workforce in the entire county (National Institute of Statistics, 2018, indicator FOM104D) and this clearly shows that the Cluj overall figures are driven by the city dynamics.

   Early papers have analyzed the IT services in Romania, especially from the IT outsourcing point of view (see Mesnita and Dumitriu, 2005) and quite some details are made available by trade associations or individual companies. This paper will focus on the development of business and support services, defined in the next section. The companies analyzed, part of which the author is a member of, did not exist in Cluj in 2007 and nowadays they employ, based on my estimates, 45%-50% of total employees in the services sector in Cluj, with a phenomenal growth rate year by year. Alongside the benefits in terms of employment and salary advancement, this growth rate brings along some pressure for the public authorities in terms of creating an environment in which these companies can strive. They operate in an asset-light model, the main resource being the human capital, and, as result, any shortage of this resource can hinder the development and trigger a relocation of services which would create additional issues for the local administration. Assuming a public administration which is open to the voice of the companies, this paper is one of the few structured attempts to crystalize an entire sector view on the opportunities and challenges of operating in Cluj. At the larger scale, the findings and the strategy can be applied to other cities, either by reproducing the steps of the research or, for communities with a similar profile, considering what challenges companies are quoting and what strategic options might be applicable.

   The paper continues with a presentation of Business Process Outsourcing and Shared Services Centers, their presence in Cluj and the methodology for the study, which includes secondary/ statistical data and a survey as means to gather primary data. Additionally, as the aim is to formulate a strategy and identify strategic options for the city, an advanced SWOT analysis is built. These three areas of research are presented in the main findings section. Future developments are also considered in the last section of the paper.

2. Business process outsourcing and shared services centers

   Year 2007 marked the first inward of multinational companies in Cluj, one of the key university cities in Romania and one of the largest in terms of population after the capital, Bucharest, for setting up centers for delivering business services, either in the form of companies setting up centers for providing services to third parties or for centralizing own activities. In case of services provided to third parties, the term used is business process outsourcing (BPO) while for own activities shared services center (SSC) is the name usually mentioned.

   On the potential question why researching a city versus country's development in this sector, I would argue that cities seem a more reasonable structural unit to be studied, as they have a life and development of their own. And, as Globalization and World Cities (GaWC) Research Network (2009) puts it, cities exist in global, outside country borders networks and 'they grow through relations with one another', of course the nature of their relations being ambivalent, both cooperative and competitive. So, cities do matter and 'their diverse roles as centers for commerce, employment, education, culture, social services and interaction, are inextricably linked with the globalization process.' (Pain, 2012, pp. 6-7)

   Table 2, based on Contractor et al. (2012, p. 8), highlights the differences between in-house activities and outsourcing, with a focus on activities which are performed in the country of the company and activities performed in a different country.

   Another angle to consider BPO versus SSC is by considering the following descriptions:

   * BPO is based on contracting of the operations and responsibilities for specific business functions or processes to a third-party service provider, replacing in-house services with labor from an outside firm (Retova and Polya, 2011). The embedded expectation when it comes to outsourcing, both for companies and public institutions, is that it provides 'a better way of performing activities' (Lazar et al., 2010).

   * For a SSC, the activities are delivered from a shared location, offering certain benefits. Unlike a centralized department it functions as an internal customer service business, charging for its services and delivering the results in accordance with set KPIs (key performance indicators), based on a contractual agreement (Deloitte, 2011).

   The types of activities performed by BPOs or in SSCs do not differ, hence the article will refer to business services or business processes. The measurable expectations around the services offered are around cost-effectiveness, reliability of support and, potentially, innovative solutions, ranging from standardization to transformation of processes (Shared Services and Outsourcing Network, 2017).

   Quickly defining business processes, as the term will be used quite frequently, the common approach is that any business activity with an input and output is a process. Davenport and Short (1990) define business processes as being 'a set of logically related tasks performed to achieve a defined business outcome'. For a more detailed definition, accounting for all the elements involved, one can study the Business Process Manifesto (Burlton, pp. 2-7). To be mentioned that earlier than 1990, Porter (1985, pp. 36-39) identified a series of primary functions in a company: firm infrastructure, human resources management, technology, development, procurement, inbound logistics, operations, outbound logistics, marketing & sales, (customer) service, which are all high-level business processes, having sub-processes and so on.

   The BPO and SSC companies in Cluj, their year of establishment and the number of employees (based on company data and my estimates), are presented in Table 3.

   As mentioned, 45%-50% of total employees in the services sector in Cluj are employed by these companies. The estimated turnover in 2017 for these companies/centers in Cluj (some of them do not report figures broken down for Cluj only) is in the range of 100-120 million [euro]/ 125-150 million $. The estimation is done based on the number of employees.

3. Factors for location selection

   Understanding the factors that lead to the initial location selection, would allow us to map potential development or what would be needed for maintaining the initial advantage. Companies are always actively considering multiple locations, ideally some well-established cities and some surprise ones, deciding based on the scope of activities as defined by diversity and size of languages to cover and type of processes. When Deloitte (2013, 2014) surveyed BPO and SSC executives a consistent key finding was that 'organizations have become more open in their location selection for SSCs as compared to 10 years ago' and 'second tier of developing outsourcing destinations can expect to see more rapid growth', but not at the expense of established sourcing destinations. This illustrates the need for continuous search for new destinations even before defining the scope of services.

   Additional to consulting companies' reports, several academic articles have been published on the topic of location selection. The ones this paper have been built on are Manning, Massini and Lewin (2008), Kedia and Mukherjee (2009), Lewin, Perm-Ajchariyawong and Russell (2011), Schmeisser (2013) and Gerbl, Mclvor and Humphreys (2016).

   Companies are in a continuous search for the next location that can accommodate the growth, the key element being the availability of workforce. The selection process of a new location is quite extensive and contains several factors (the framework is based on author's research, yet to be published).

   Qualifying Factors:

   --Presence of local universities; and

   --Presence of a local airport within a decent radius.

   Assessment Factors:

   --Availability of foreign languages skills in the talent pool;

   --Experienced individuals in the market on the desired processes;

   --Potential for cost optimization;

   --IT&C infrastructure;

   --Real estate availability & quality;

   --Business climate and competition;

   ...