1

What can the Baltics offer in functional expertise, efficiency and service quality versus Central and Eastern European (CEE) countries?

When it comes to selecting a location from among the CEE countries, Poland, the Czech Republic and Hungary usually come to the top of the list, which is fair considering their market sizes and maturity as investment destinations. However, the Baltic States, with their fast-paced economies, modern infrastructure and highly skilled labor force, have been unfairly sidelined by major investors for quite a long time.

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Currently, the situation is changing. With more and more investment projects choosing the Baltic States as a nearshoring destination, this location is firmly placed on the investors’ focus map. Many investors who have chosen the Baltics as their investment destination already enjoy business growth thanks to the discovery of the benefits the Baltic States can offer.

As global economic uncertainty continues, cost reduction, focus on the value added activities, effective risk and project management remain the key imperatives. Organizations are required to manage a multitude of challenges, including:

• Slow growth in mature markets• Realizing the full growth potential in emerging markets

and managing the risk of operating in these markets• The opportunities and threats of new technologies • The ever-changing and increasing burden of regulatory

compliance

Leading organizations are challenging the status quo of their risk, control and compliance operating models; they are looking at ways in which they too can contribute to cost

reduction, whilst enhancing efficiency and risk management capabilities.

The outsourcing trends today demonstrate clear movement from a regional towards a global set-up with the focus on scope expansion, improved governance, further automation and end-to-end processing. In particular, the following trends can be identified: • Size: increasing adoption by smaller scale operations• Technology: optimizing investment in ERP and global

technology• Functions: Extending the value chain with added

functional breadth• Region: Movement from local and regional to global

service organizations• Make or Buy: Dedicated selected sourcing based on value

contribution

The goal is to create service organizations that can compete with the best the markets have to offer in functional expertise, efficiency and service quality, whether in finance, information technology, human resources or other service areas.

Global outsourcing trends

Outsourcing trends indicate a clear movement from a regional towards a global set-up with a focus on scope expansion, improved governance, further automation and end-to-end processing.

Given this fact, we have tried to benchmark the Baltic States with the other major Central and East European (CEE) countries in order to provide comparative insights, which will be useful for our clients in their successful transfer of the shared service model to the right location.

Size

Technology

Functions

Region

Make or buy

Time 1990 1995 2000 2005 2010 2015 Trends

> €6.5 bn revenue,>250 seats > €1.3 bn revenue,>75 seats

Global communications Self Service Applications

ERP standardization Enabling technology Global Workflows

Finance and general admin Expand finance

IT HR Purchasing

Regional

SSC & BPO mixOutsourcing other functions

Local Global

IT outsourcing (Operations) Business Process Outsourcing CPO

Captive Shared Services Operations

Increasing adoption by smaller scale operations

Optimizing investment in ERP and global technology

Extending up value chain adding functional breadth

Movement from local and regional to global service organizations

Dedicated selected sourcing based on value contribution

The Baltic States are offering a stable growth platform for Nordic, UK, US and German investments.

Wind of Change

3

Business case for the Baltics

Service Centers

• Banking and Insurance• Financial Analytics• Legal Process Outsourcing

Life Sciences

• Biosimilars• Industrial Biotech

Electronics and electrical engineering

• Oil and Gas• Medical Devices• Lasers

Mechanical Engineering

• Oil and Gas• Agriculture / Heavy equipment• MRO

IT

• Emerging Product Companies• Data Centers

Key focus sectors and segments in the Baltics for investors

SSC in the Baltics vs CEE

Estonia Latvia Lithuania Poland Czech Republic Romania Bulgaria

Population 1.3m 2m 2.9m 38.5m 10.5m 21m 7.3m

# of centers 75 36 52 >470 >200 >80 >45

# of employees 6,000 5,000 11,000 130,000 55,000 45,000 >22,000

# of employees (% of the labor force)

0.5% 0.3% 0.4% 0.3% 0.5% 0.2% 0.3%

Main Service center/BPO location(s)

Tallinn Riga Vilnius Krakow, Warsaw, Wroclaw, Katowice, Lodz, Poznan

Prague, Brno, Ostrava

Bucharest, Cluj, Napoca, Timisoara

Sofia

Key functional coverage

RigaFinance, IT, HR

Finance& Accounting, HR

BIFS, Finance& Accounting IT

Knowledge Process Outsourcing, IT

Customer support, technical support, Market research, Finance & Accounting

Customer services, Back office transactions, IT

LIAA, Enterprise Estonia, Invest Lithuania, etc.

The table above indicates that despite the rapid growth, the Baltic SSC sector is still not fully saturated and has a significant growth potential compared to the peers in CEE.

An integral part of the safe Nordic-Baltic business harbour

4

1 Eurostat, 20132 The 2014 A.T. Kearney Global Services Location Index™3 Eurostat, 2013

More than 20% of the population speak 3 foreign languages³

Top 25 rank worldwide as the best destinations for providing outsourcing activities²

More than 40% students graduating from social science, business and law¹

Key facts about the Baltics:

Cost competitivenessThe Baltic States offer a strong cost competitive position to all investments compared to CEE peers.

Key facts about the Baltics:

0% profit tax incentives in Free Economic Zones and other special incentives for foreign investment3

One of the fastest productivity growth rates in the EU 2005-20131

5 times lower labor cost compared to UK, Germany and Scandinavian countries1

Ranked Top 15 in terms of pay and productivity rank worldwide2

1 Various publicly available sources, 20152 Eurostat, 20133 The 2014 A.T. Kearney Global Services Location Index™4 Eurostat, 2013

Cost effective human capital offering wide efficiency gains

5

0

10

20

30

40

50

60

4 5 6 68 9 10

21

31 31

3840

49

Norway

Sweden

Denmark

Finland

Germany

United Kingdom

Czech

Republic

Estonia

PolandLatvia

Lithuania

Romania

Bulgaria

Labor cost per hour, EUR

Eurostat 2013

Profitability growth 2013 vs 2005

The most attractive countries in terms of labor cost are Bulgaria, Romania, Lithuania and Latvia. Compared to mature markets (UK, Germany, Finland, Denmark, Sweden and Norway), the difference in labor costs per hour is 5 times lower.

-10% 0% 10% 20% 30% 40% 50%

42%

38%

26%

24%

23%

22%

12%

7%

7%

4%

3%

1%

-5Norway

United Kingdom

Finland

Denmark

Sweden

Germany

Czech Republic

Romania

Bulgaria

Estonia

Poland

Lithuania

Latvia

Eurostat 2014The labor productivity = GDP/ETO withGDP = Gross domestic product, chain-linked volumes reference year 2013ETO = Total employment, all industries, in persons

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According to GCI, Estonia, Lithuania and Latvia have the best rank in terms of pay and productivity.

LLRI carried out an analysis of labor relations’ flexibility. The results show that the best ranked country is Bulgaria. The Czech Republic, Poland, Estonia, Romania and Latvia are very close, while Lithuania is the least flexible country in terms of labor relations.

Labor relations flexibility rank

0

30

60

90

120

150

11

7484 86

93 94

127

LithuaniaLatviaRomaniaEstoniaPolandCzech Republic

Bulgaria

LLRI 2012

0

1

2

3

4

54.9 4.8 4.8 4.7 4.6

4.34.1 4.1 4.0 4.0 3.9 3.8 3.7

Norway

Sweden

Finland

Romania

Denmark

Bulgaria

Poland

Germany

Czech

Republic

United Kingdom

Latvia

Lithuania

Estonia

Pay and productivity GCI rank (1-7 best)

Global Competitive Index 2015

7

Wide talent pool As young and vibrant nations, the Baltics States are known for efficiency, creativity, hard work and wide skill set.

Over the last 20 years the Baltics have heavily invested in people, creating a strong talent pool.

Baltic States vs CEE countries

Share of population aged 15-64 with upper secondary, post-secondary non-tertiary or tertiary education

Key facts about the Baltics:

1 Eurostat, 2013

of population aged 15-64 has upper secondary, post-secondary non-tertiary or tertiary education1

80%+

share of the population aged 25-64 speaks at least one foreign language1

90%+

3m+

labor pool1

40%+

share of the population speaks English as a second language1

Multi-skilled, energetic and creative people offering out-of-the-box solutions in product and service development

0

20

40

60

80

100

87% 86% 84% 84% 83%

72%

RomaniaLatviaPolandEstoniaLithuaniaCzech Republic

Eurostat 2013

8

Estonia, Latvia and Lithuania are the leading CEE countries by the percentage of population speaking English as well as at least 2 foreign languages.

Modern ICT and infrastructureThe Baltic States offer the most up-to-date ICT technologies with full functionality in the entire region.

Latvia is 6th globally for measured internet connection speed3

Estoniahosts NATO's Cyber Defense Center of Excellence2

TOP 5 in CEE for quality of transport and railroad infrastructure1

Lithuania is leading in the EU and top 7th globally by broadband speed4

Key facts about the Baltics:

1 IMB Competitiveness report, 20142 Invest Estonia3 Akamai’s state of the internet report, 20144 Ookla Net Index, 2014

Modern and efficient infrastructure to boost business needs

Share of population that speaks 2 foreign languages and speaks English as a foreign language

0%

10%

20%

30%

40%

50%

60%

46

38

50

27

3331

25

5452 52

22 22 2219

BulgariaRomaniaPolandCzech RepublicEstoniaLithuaniaLatvia

Speak at least two foreign languages Speak English as a foreign language

Eurostat 2012

9

0 20 40 60 80 100 120

17

23

24

30

32

3637

3844

4851

54

65

6875

91

107Bosnia and HerzegovinaSerbia

KosovoAlbaniaCroatia

HungarySloveniaRomania

Czech RepublicBulgaria

Slovak RepublicMontenegro

PolandMacedonia, FYR

LithuaniaLatvia

Estonia

Business-friendly environment

Top 3 CEE countries by Ease of Doing Business Rank, WBG 2014

Ease of Doing Business Rank

The Baltics are the leading CEE countries in the Ease of Doing Business ranking.

Membership in EU, NATO, WTO and Schengen zone.

Tax treaties with major markets including China, Russia and the USA.

Financial support for foreign direct investments including grants from the European Union Structural Funds.

10

Availability of R&D centers When you think of major technology hubs across the globe, the Baltic States is not an obvious place that comes to mind. But this seems to be changing, with the Baltic States becoming a vibrant and growing technology scene, which has been bubbling under the surface for some time. Given this fact, research and development capabilities play a crucial role in selecting the right location where high value added services and products could be created.

It is worth mentioning that the total R&D personnel, as a percentage of the economically active population in the Baltics, is slightly higher than in Bulgaria and Romania, but is still lagging behind the Czech Republic. R&D spending in

R&D personnel (% of total labor force)

Geo\time 2010 2011 2012 2013Czech Republic 0.99 1.07 1.15 1.17

Estonia 0.77 0.83 0.86 0.86

Lithuania 0.81 0.75 0.71 0.76

Poland 0.48 0.49 0.52 0.54

Latvia 0.53 0.53 0.54 0.53

Bulgaria 0.49 0.51 0.5 0.52

Romania 0.26 0.3 0.31 0.34

Eurostat 2015

Estonia has increased considerably in recent years reaching 2.2% of GDP in 2012. This increase may well result in improved productivity and competitiveness in the future (Andrews and Westmore, 2014).

To boost innovations and R&D, the Baltics have significantly increased government support for start-up initiatives. Latvia’s startup scene is smaller by comparison, but expanding quickly, with rapidly growing numbers of new entrepreneurs joining its ecosystem. As an up and coming tech hub for entrepreneurs with big ideas, the Baltics have plans for the future and an eye on the global marketplace.

Skills and technology ready to serve most demanding R&D needs

11

Competitive position of the Baltics in education and R&D field

Estonia Latvia Lithuania

Rank 34th

worldwide university-industry collaboration64th

worldwide university-industry collaboration27th

worldwide university-industry collaboration

Universities 3 universities; 9 specialized universities; 8 private education institutions

6 universities; 22 colleges 23 universities; 24 colleges

Incentives No expenditure-based R&D tax incentives Triple tax deduction for R&D1

Competencies 12 research CoEs:

• Computer Science High-Technology Materials for Sustainable Development

• Integrated Electronic Systems and Biomedical Engineering

• Chemical Biology Translational Medicine• Genomics, etc.

6 research CoEs:

• ICT• Biomedicine• Pharmaceuticals• Material Science• Magneto-hydrodynamics, liquid metals

technologies• Wood chemistry

5 Integrated science, study and business Valleys:

• ICT and Life Sciences• Sustainable Pharmacy• Physical and Technological Sciences• Agricultural Sciences• Marine Sciences and Technologies

1 Finance Estonia, Investment and Development Agency of Latvia, Invest Lithuania

Strategic location

1 Day 2 Days 3 Days 4 Days

Baltic Sea region population

110 m

CIS population

250 m

WE population

240 m

Mar

kets

Enterprise Estonia, Investment and Development Agency of Latvia, Invest Lithuania

Truck delivery times

Location, location, location

12

Key facts about the Baltics:

1 Finance Estonia, Investment and Development Agency of Latvia, Invest Lithuania

4 days to reach WE and CIS countries by road transport1

600 m potential market size servicing three major markets: WE, Baltic Sea region and CIS1

Shuttle cargo railway services to WE, CIS and Asia

7 ice-free seaports

One of the competitive advantages for the Baltics is location and air traffic intensity. It is possible to fly directly to 83 destinations from Riga, 65 from Vilnius, 32 from Tallinn.

The number of passengers per inhabitant in the Baltics, especially Latvia, is significantly ahead compared to Bulgaria, Poland or Romania. Riga International Airport is one of the key

Air traffic passengers

Geo\time (1000)

Passengers per inhabitant

Number of direct flights

Latvia 4,755 2.3 83 (Riga)

Estonia 2,202 1.7 32 (Tallinn)

Lithuania 3,167 1.1 65 (Vilnius)

Czech Republic 11,742 1.1 130 (Vaclav Havel Prague Airport)

Bulgaria 6,819 0.9 50 (Sofia Airport)

Poland 21,791 0.6 85 (Warsaw Chopin Airport)

Romania 9,674 0.5 n/a

Eurostat 2014

success factors in attracting investors to the Baltics. In 2014 it was the biggest Baltics air traffic hub – 46% of the region’s passenger traffic goes through Riga. The Air Transport Research Society (ATRS) has made a comparison of the financial data of 200 airports and has selected Riga Airport as the most competitive airport in Europe in terms of costs and tariff structure per passenger.

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Large-scale international cultural events, high-class restaurants, museums and exhibits, ecotourism and well-developed recreation facilities, world-class health infrastructure, fast-growing expat community and thriving natural environment play major roles when selecting the right location.

Quality of life

Global Competitiveness Index

Geo\time GCI 2014-2015 (out of 144)

GCI 2013-2014 (out of 148)

Czech Republic 29 32 +3

Estonia 37 46 +9

Lithuania 41 48 +7

Poland 42 52 +10

Latvia 43 42 -1

Bulgaria 54 57 +3

Romania 59 76 +17

Key facts about the Baltics:

International schools and universities available²

Tallinn, Riga and Vilnius ranked in the Top 7 in terms of air quality in Europe¹

Cost of living is 2 times lower compared to the UK, Germany and Scandinavian countries³

2-3 hour flights to major European cities and Moscow

1 Green city index, 20142 Finance Estonia, Investment and Development Agency of Latvia, Invest Lithuania3 Eurostat, 2013

Rich cultural heritage, beautiful landscapes coupled with the modern world beats

14

According to the Global Competitiveness Index 2014-2015 published by the World Economic Forum, Estonia holds the 29th, Lithuania the 41st and Latvia the 42nd position among 144 analyzed world developing economies, all 3 showing significant growth in the ranking compared to the previous period 2013-2014.

03 06 09 0 120 150

Estonia

Czech Republic

Lithuania

Poland

Latvia

Romania

BulgariaQuality of Life Index

According to the study Quality of Life Index, Estonia ranked the 21st world’s best country to live in, which outruns countries like France and Spain. According to this study, all the Baltic States have high scores in the safety and health care indexes. Moreover, according to OECD Better life index, Estonia ranks above the average in education and skills, environmental quality and work-life balance.

The Baltic States are valued among investors as a region with rich cultural heritage, a popular travel destination with broad spectrum of cultural offerings, thriving natural environment, world-class health infrastructure and growing and innovative economies.

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Key facts about EY Baltics:

A member of the EY global network with cross-service and cross-border teams

More than 500 well educated experienced professionals in the Baltics

1st overall market position

Deep industry knowledge, expertise and contacts in public and private sectors

20+ years presence on the market“Single-point-of-service” and account-centric approach in any of the Baltics

Multidisciplinary professional services• Audit, assurance and fraud risk investigation• Tax and legal• Accounting outsourcing• Compliance and reporting• Transaction advisory • Business advisory

Specialization by industries:

• Banking and Insurance• Technology• Telecommunications• Life sciences• Manufacturing• Transportation• Governmental• Energy

EY has an experienced multidisciplinary team with global coverage to assist our customers in all the phases of shared service programs. We will help not only with process, technology, change and project management but also with tax, site selection and internal control implications of the shared services strategy.

Moreover, our global coverage ensures that we have people with the right local skills and experience for multi-country implementations. EY in the Baltics has more than 20-years presence in the market and employs more than 500 experienced professionals.

EY in the Baltic States

A market leading professional services organisation

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Vaida Lapinskiene

Global Compliance and Reporting Services LeaderTel.: + 370 5 274 2200vaida.lapinskiene@lt.ey.com

Linas Dicpetris

Advisory Services LeaderTel.: +370 5 274 2200 linas.dicpetris@lt.ey.com

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About EY

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© 2015 Ernst & Young Baltic UABAll Rights Reserved.

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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