Expert insight: Why Lithuania is leading Eastern Europe’s offshore revolution

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World-beating infrastructure, low costs and highly educated, multilingual talent make the Baltic state an attractive destination for international finance, explains business consultants Invest Lithuania.

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Lithuania’s favourable business tax regime is a powerful incentive, together with government support for up to 50% of staff training costs and other incentives are available.

Lithuania may not be the first name that comes to mind when you think of international finance. But in an increasingly competitive global market in which companies seek new ways to increase efficiency and lower costs, the Baltic state is making serious waves.

Barclays, Nasdaq and Danske Bank are just three of the big names that have relocated key services to Lithuania in recent years, in a move that has seen the country become a global centre for business functions delivery.

The charge eastwards was led by key players from the Nordic countries, attracted by the benefits of nearshoring financial services. But the trend looks set to continue as companies from the UK and US eye the region as a financial services location and global delivery centre in the wake of Brexit.

With world-beating infrastructure, a ready pool of talent and real-estate costs a fraction of those in London or Frankfurt, Lithuania’s capital, Vilnius, and fast-rising second city, Kaunas, have become popular destinations for shared service centres (SSC) and business process outsourcing (BPO).

So just what is it that makes the Eastern European state so attractive as a financial and global business services location?

Why Lithuania?

With the fastest-growing GDP in the EU since 2000 according to Eurostat, and projected growth for 2017 of 2.7% - compared to an EU-wide of 1.6% - the Baltic state is building economic success by creating an ideal environment for offshoring and global business service centres.

At just 15 EUR per square metre, the average cost of office space in Vilnius is nearly nine times lower than the central London average of 133.6 EUR. State-of-the-art infrastructure (including the best mobile 4G broadband coverage and leading broadband speed in the EU), plus flight times of less than three hours to all major European cities, make the city among the most connected in Europe.

And if Lithuania is attractive to its neighbours, its appeal to international investors in the wake of Brexit is even stronger. A member of the Euro zone since 2015, Lithuania is eyeing its future as a foothold in the European Union, combining a high-quality business environment with low costs.

Situated 7 hours ahead of New York and 9 hours behind the Australian financial capital, Sydney, the Baltic state also makes a compelling case for businesses seeking to meet the needs of an increasingly globalised, 24-hour business cycle.

Expertise on tap

But it’s the country’s highly skilled workforce that gives Lithuania its greatest competitive edge. With 53% of the population having higher education – one of the highest figures in the world – Lithuania offers a plentiful supply of degree-level talent.

That local expertise comes in the areas that count, too: according to Europe’s statistics agency Eurostat, the country boasts the highest number of graduates per capital in the EU – more than twice the EU average - in business administration, mathematics and statistics.

Companies such as SEB, Barclays or Nasdaq currently employ more than 24,000 experienced professionals in the country’s financial services sector. Their expertise ranges from business analytics and forecasting to credit management and fixed asset accounting, with certification from international bodies such as the ACCA, CIIA and CFA. But although the local skills base is already well developed, the market is far from saturated – and the potential for expansion is vast. Only 19 employees per 1,000 currently work in the financial sector in Vilnius, compared to 66.1 in Kraków in neighbouring Poland. In Lithuania’s second city, Kaunas, the figure is just 6.7 per 1,000.

To satisfy the needs of a growing number of international businesses, further talent is coming onstream. More than 34,900 students enrolled in finance, economics, business administration and similar programs at universities and colleges in 2015-16. Institutions are working hand-in-hand with business to develop innovative new tools. These include the Bloomberg research lab at Kaunas Technology University, opened in 2015, which provides up-to-the-minute market data to students and researchers. Banking giant Barclays is also involved in major IT projects at KTU and Vilnius University, aimed at further developing the graduate skills base.

Through creative collaborations such as these, Lithuania’s emerging talent are tuned in to the needs of the market. Shared service centres are a popular choice, with four out of the top five most desired employers in a recent survey being SSCs. That popularity is underlined by employee motivation and commitment, with 46% of centres reporting attrition of 10% or less.

Ready for global challenge

Lithuanians are also well equipped to communicate with a modern, globalised business world. Eighty-four per cent of young professionals speak English, and more than 52% of the population is fluent in at least two foreign languages.

The availability of Norwegian, Danish, Swedish and Finnish speakers has made Lithuania a popular choice for Nordic financial institutions wishing to nearshore customer services and other operations – but an increasing number of operations are serving markets further afield. Almost a third (32%) of centres now provide services in six or more languages, with one centre serving clients in as many as 34.

Cost-effective choice

For many organisations considering offshoring, however, the biggest question is costs. Lithuania’s favourable business tax regime is a powerful incentive, together with government support for up to 50% of staff training costs and other incentives are available, delivered via the agency Invest Lithuania (LINK: http://www.investlithuania.com).

But although Lithuania ranks alongside Ireland, Germany and Switzerland for the quality of its business environment, the country outstrips all of them in terms of its quality-to-cost ratio.

While Lithuania offers some of the most highly educated and qualified financial and accounting workers in Europe, salaries in the country are among the lowest in the EU. National statistics data from 2016 puts Lithuania’s average gross monthly salary at 715 EUR. That’s almost most five times lower than the UK average of 3509 EUR – and more than 27% lower than the 985 EUR average in Poland, one of its neighbours in the Central and Eastern Europe (CEE) region.

Economic indicators also predict that there will be no nasty surprises around the corner. At 4.5%, wage inflation in Lithuania is projected to remain lower over the next three years than in major international competitors, including India, which has a projected rate of 10.3%.

Leading the charge

Lithuania’s appeal has resulted in a broad base of foreign investment. The business services sector more than quadrupled in the decade to 2015, to a total of 50 centres. More than 50% of these are owned by Nordic companies, with early adopters SEB and Danske Bank being joined more recently by the likes of Lindorff, Swedbank and Skandia. All were attracted to nearshoring opportunities in Lithuania by the country’s geographical proximity, multilingual talent, similarities in working culture and “can-do” attitude.

But while the Nordic countries may have gained a headstart, Lithuania has been quick to attract broader international interest. US financial giant Western Union opened its global business services centre in the country in 2010. At 18%, American companies now make up the single largest block of investors in the market. UK companies represent 12% of investors – a figure that’s likely to grow as the terms of Brexit become clear.

Other countries, including Canada, Germany, France and even near-neighbour Poland, account for another 14% of investment. And as investors have diversified, so have the markets served. Of centres serving three or more regions, 50% now provide services to the Americas, with 37% to Asia.

While banking and finance is still the dominant industry at 36% of centres, IT services (24% of investors) are a growing part of the mix, with a ready supply of tech-savvy graduates attracting investment from forward-thinking, disruptive players in the market such as Uber, which opened a centre in the country in 2015.

Advanced solutions

Local expertise in diverse fields such big data analytics have played a crucial role, offering financial operators the opportunity to develop a more holistic approach to offshoring that integrates benefits across the whole range of their business operations.

As Arminta Saladžienė, head of Baltic operations at US-owned Nasdaq, which opened a word-class centre of excellence that combines IT and analytics with F&A, HR and customer operations, puts it: “For companies like us that develop advanced solutions, Lithuania provides the perfect mix of exceptional infrastructure and exceptional talent.”

OFFSHORING IN LITHUANIA:

Seven stats that explain the trend.

5 times lower salaries in the financial sector compared to UK.
84% of young professionals speak English.
53% of population has higher education.
Up to 25% government help with staff wages.
Fourfold increase in investors over a decade.
Big names include Barclays, Western Union, Bloomberg, Danske Bank, SEB.
Global reach: 50% of centres serve Americas, 37% Asia.

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Miglė Ravnialičevaitė
sem.lt
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