Case Studies

References: 7.2, 7.3

These company case studies were prepared in the framework of the project. Summaries of the individual case studies are presented below.

EDS
EDS is a US based company. It has 117,000 employees worldwide; its sales were 22 billion USD (2006) of which the EMEA region took around 40 %. In the EMEA region, the UK represents half of the sales. EDS is present in basically all European countries, with affiliates, representative offices with varying numbers of employees. It is present in all Visegrad countries, originally with personnel of 50-100 since the beginning of the nineties (1991). This employee number rose in Hungary only to around 2,000.

A quick growth of the local  market,  due to big contracts, was the basis for attracting more and more export-oriented services to Hungary; in the Czech Republic and Poland, the number of staff remained at around 100. Changes coincide with the tendency of outsourcing various services to owned or acquired companies. These companies were put into competitive environments in the nineties, e.g. EDS was not in a monopoly position even for services provided for its owner, to the GM. It also coincides with changes in relationship with service clients: in the nineties: client-based services, tailor-made services to clients dominated; while starting from around  2,000, not only equipments, but also services in informatics moved towards being more uniform, not personalised. This helped reducing costs significantly and raising competitiveness (even for client companies).

From that time on, shared service centres were set up, which provide more than one partner with the services in question. Parallel  with that, the process of offshore outsourcing and relocation started, when Anglo-Saxon countries relocated certain services to India (this country was chosen because of the language) and there was a quest for finding locations in Europe, which would be an ideal location for outsourcing/relocating. Hungary is a good destination from that point of view, given labour costs, skills and language knowledge (German and “small” European languages). The company has its headquarter in Budapest, and further locations in the countryside: Vasvár/Rábahídvég/Szentgotthárd.

The mode of entry was greenfield, and further on capacity extensions dominated. In 1991, when the Hungarian affiliate was established, the company had seven employees, at present the number of employees exceeds 1,700. Production is relatively export-intensive: around 60 % of total sales are realised abroad. The company deploys negligible local supplies. There is some subcontracting to local firms mainly for servicing the local market. For export-oriented activities: there is less than 1 per cent local input from outside the company.

The company carries out various activities in Hungary: ITO, BPO, call centres, financial and accounting services, and now engineering services will be added to the list. Some of the activities were relocated from other European countries, especially Germany and the Benelux countries: mainly call centres. Finance and accounting services were provided basically in all European countries, this is now centred to Hungary. BPO is part of a new structure; it is from the beginning located to Hungary.
As far as the motivation of the company for locating these activities to Hungary is concerned, they “Best Shore” activities. It means that analysis and decision are taken at the US HQ. The most important influencing factors of location decisions are among others: geographical proximity, labour costs, relevant skills (including language knowledge); predictable business environment; legal environment and level of harmonisation with other countries (they consider the V4 to be at a very similar level from these latter two points of view).

For Hungary, there was an additional advantage: because of minorities in neighbouring countries, there are many employees speaking multiple languages, including “small” languages. (They employ mainly economists, engineers and IT specialists with at least two foreign languages.) The company have not received any incentives until 2005, thus incentives did not play a part in the decision. (The presence of Opel/GM - majority owner - in Hungary was the main reason for coming to Hungary in 1991, but not for further expansion.)

As far as the company’s local activity and links with local economic and non- economic actors is concerned, is concerned, it is amongst the most active members of AMCHAM. It has links with universities, partly with the aim of enhancing future recruitment. Links with local governments: good connection in the countryside plant, also with the local labour centre (they employed long-term unemployed people when capacity expansion was carried out there.) In a few cases they cooperate with local firms depending on local business opportunities, they have a few subcontractors, mainly local (Hungarian owned) firms, including some SMEs, first of all in software development. The share of local supplies is negligible, especially in export sales. In a few cases when they use local supplies in higher value added activities, the main reason for that is the quicker fulfilment of the contract. In a few cases former EDS workers start up their own firms, with these the company has some cooperation. Cooperation with other and with these start-up firms are the main ways for helping local suppliers.

In terms of competitors, EDS is the market leader in ITO and BPO, other companies employ less people and have lower sales, e.g. IBM is the second in the market (employing 1,000), others are much smaller (SAP: 200) in software development. They have links with these companies in the sector in organisations, associations where they are members (e.g. Hungarian Outsourcing Association, Shared Service Centre Association).

As far as the main market of the firm is concerned, it provides services to almost all European  countries, with English and German (German in the more important), as dominant languages. In the call centre: they provide services in 14 languages, including smaller European languages, which means, they reach out to almost all Europe (except for French and Italian speaking Europe). In terms of the level of technology employed in the company, it uses the highest level.

The company recruits graduates. Selection is based on universities, language knowledge. There is a problem in recruiting: they cannot find enough people: at present there are 200 vacancies. In terms of the structure of employees: the average age is 25-30; gender structure depends on the subsectors: there are less female IT specialists and less male in HR, thus the overall distribution is similar to that of the total labour market. There are 80 per cent university graduates, and less than 10 per cent unskilled physical workers.

As far as the management is concerned, because of cost considerations, the share of expats is always very low; at present of 25 higher level managers only 2 expats (usually that is the case). The employees are continuously trained, from their start of work, when they have a 1-4 months intensive training. Employees can choose from 2000 online training courses. In trainings depending on the position: about 15-20 % is provided by another company (not inside EDS). There are also language trainings. Employees usually have full time contracts, only 1-2 per cent of employees have part time contract. Additional benefits for the employees include social events, cafeteria-system, and corporate insurance system. Works Council and trade union are active at the company, they conclude annual agreements.
The Hungarian affiliate is one of the five global service centres, in terms of its position in the global organisation structure of the company (“Best Shore”). In Europe, there is only one global service centre. As far as the independence of the affiliate is concerned, in decision making: every decision is taken locally, except for investments, capacity expansions, and strategy: these are given (HQ). The company plans further extensions in Hungary, they want to expand to 2000 employees. (Part of that has been already carried out in the period between taking the interview and writing the report.)


SAP
The second company’s, SAP’s HQ is in Germany. It is a market leader globally in its segment (Gartner Research: leader globally in enterprise resource planning, (ERP), in customer  relationship management, (CRM) and in supply chain management, (SCM), third in global software production.) In 2006, the company had 39300 employees globally; its global sales reached 9.4 billion Euros. It is present in 50 countries in the world, it sells (through exports) in more than 100 countries. The company is present in all NMS with a representative office. On top of that, it has service centre and development centre in Bulgaria and Hungary, and an SSC in the Czech Republic.

In Hungary, it is located in Budapest. It established a representative office in 1991 here, and then capacity extension was made in 1996 and the software development centre was opened in 2005. It invested around 1 million Euros into its software development branch in Hungary. The mode of entry was greenfield investment. At the start, 70 employees worked for the software development centre, at present they are 245. Sales are around 3.5 billion HUF. All software developments (production) is exported, thus the export/sales ratio is 100 %. Local inputs are basically nil: cleaning, security, canteen, some training, less than 1 % of total sales are “sourced” locally.

The Hungarian affiliate’s main activity is software development (and support, but this  activity is present in every country), ERP (integrated enterprise programmes) and connected software, such as SCM (supply chain management), CRM. It is one of the ten development centres of SAP in the world. (Others: Germany, USA, Canada, India, Japan, China, Israel, France, Bulgaria.) About 60 per cent of big-sized companies in Hungary use SAP software, so it is probably now the market leader, in terms of employees, Sysdata, the Siemens affiliate is bigger, so SAP can be the second. In terms of relocation of activities: partly relocated (SCM= Supply Chain Management), partly new  activity/product (capacity extension), partly from Germany, partly from India.

As far as choosing Hungary as the location of the investment, in 2005, SAP wanted to open a software development centre in the region (proximity to Germany counts). The Visegrad countries, Moscow, Romania competed, Hungary won. The reason can be the good experience with the affiliate, availability of the required workforce (trained in informatics and knowing English language) and the good geographical position of Budapest from their point of view, and besides these, the good level of required infrastructure (e.g. that is why Romania was out).

As far as the local activity, links with local companies, and other economic and non-economic actors is concerned, SAP Hungary tries to intensify contacts with other companies, in the framework of AMCHAM, of German-Hungarian Chamber of Commerce, of the Association of Innovative Companies, and in Hungarian Outsourcing Association. The company is active member of these associations. The share of local suppliers is very low; the company buys only some local services.
All of the production is exported, the company carries out global supply, and it develops the SCM software. The level of technology is the highest.

As far as employment is concerned, the company pays average wages (in sectoral comparison). At the beginning there were many applicants for the jobs in the affiliate, starting from last year, they have problems with recruitment. In order to overcome the problem, they establish contacts with university students (already in their second year). For the company, the issuer (university) of the diploma is important; the applicants have to undergo a 4 stage examination process (tests, interviews etc.). They sometimes recruit when there are lay-offs in some companies (e.g. Nokia, Siemens) and or when people leave companies with different culture. There is no outsourcing of employees from other companies. As for the structure of employees, there are altogether 350 employees at SAP Hungary, 245 in software development, of these close to 100 % graduates (two persons without diploma), and the average age is 29 years. There are 85 % males among the employees. As far as the management is concerned, now it consists only of local (Hungarian) managers, there were 1 or 2 expats at the beginning among the managers. Now five to seven foreigners work in the Hungarian affiliate, but none of them in leading positions.

Training is basically continuous. When someone takes up a job, at the beginning there is two-month training, then three to four months on the job training. As a kind of spillover, there are people, who leave the company after being trained, because in other companies or as a freelancer (setting up their own companies), they can earn more with that special knowledge. Contracts are full time. Part time contracts are given to outstanding university students (before graduation), if they plan to join later the company. On top of the salaries, there are additional benefits. There is a free canteen (free lunch and refreshments), own fitness room, free language courses, free health care, free insurance (own insurance system, providing help for the families of the workers as well in the case of an employee gets ill or dies), internet access for homes of  employees  is  also paid by the company. As far as the independence of the affiliate is concerned, development directions are decided at the centre (HQ), while local decisions affect employees and local supplies (limited).