Xtrasource,Specific Difficulties of

SMEs’ FDIBest in France Case Study

15 December 2003

“The French Agency for International Investment” works to help the international investors in settling and developing their activities in France.

Our aim is to convince you that our country is a land of prosperity, at the heart of the leading world market: Europe.

Our value added is the way we manage to optimize the conditions for your project success, to inform you on the legal frame as well as on the different public incentives, to advise you on your choice concerning the area to settle in, and finally to ease your administrative, legal, tax and labour procedures”.

Clara GAYMARD,Ambassador at large in charge of international investment

Introduction

Foreign Direct Investment (FDI) has became crucial to developed countries to offset de-localization trend. FDI is a way to improve one country’s balance of payment, create jobs and foster innovation.

Each and every European country defined action plans to attract FDI based on administrative support, incentives and grants programs. National agencies have been set-up, like AFII in France or UKT&I in the UK.

However, if one company can easily benchmark countries, it become more difficult when to choose the right location within a given country: cities and/or regions compete against each others and national agencies are of little assistance once the choice have been made to invest in France.

Why Xtrsource?

We chose to study Xtrasource for several reasons:

• First, we wanted to illustrate a growing concern about delocalization of service companies: the current trend to delocalize services (call centers to Maghreb, programming companies to India…) will be reinforced by new international regulations issued from the on-going GATS negotiations.

• Second, we decided to focus on a SME since we think that little work has been carried out of the kind of companies compared to large FDI. This is all the more important since more that 50% of French FDI is from SMEs. We think that this investment, even though crucial for France, is less supported than large investments such as Toyota…

• Last, Xtrasource case illustrates difficulties a company can face after choosing to invest in France. Authorities usually see FDI in the short run (from identification to choice) since companies are clearly focused on the long run (effective operations). From these differences arise misunderstanding and –this may be the worst- lack of confidence and reputation of France.

Content:

1. The company

2. The location

3. Adaptation to France

4. Conclusion

Part 1:

The company

The Xtrasource companyOverview

Xtrasource is one of the world's leading advanced call center providers. The company offers a wide range of integrated customer solutions from help desk to technical assistance to live web chat. Xtrasource's call centers are strategically located across the globe offering services in 28 languages in more than 60 countries.

Xtrasource do customer and web call center support with some of the world's best - like Philips, Sun Microsystems, NEC, and Thomson Multi Media (RCA).

The company was created in 1995 in the U.S.A and is owned by its founders and employees.

The Xtrasource companyThomas C. Tyler, CEO

Mr. Tyler is the founder of Xtrasource and serves as the Company’s President & CEO, and is Chairman of the Board.

From 1989 through 1994, Mr. Tyler was President and CEO of Universal Electronics Inc. (NASDAQ), a Cleveland-based manufacturer of universal remote controls (ONE FOR ALL™ Brand). During his tenure with Universal, Mr. Tyler expanded the company by diversification of products and markets, raising sales from $240,000 in 1988 to $96 million in 1994, making Universal #7 on the list of BusinessWeek magazine’s 100 Hottest Growing Small Companies List in America. Mr. Tyler was honored in 1993 as the “Northeast Ohio Entrepreneur of the Year”, an award sponsored by ERNST & YOUNG, Inc. Magazine and Merrill Lynch. Mr. Tyler also received the Weatherhead 100 Award three years consecutively for the Fastest Growing Company in Northeast Ohio, which was sponsored by Case Western University’s Weatherhead School of Business.

The Xtrasource companyMeno Buys, VP International

In 2000, Mr. Buys was the Company’s Vice President, International. He was the General Manager of all European operations and helped coordinate the South American activities.

From 1991 until 1996, Mr. Buys was employed by Universal Electronics Inc. as its Vice President International. Mr. Buys founded and served as Managing Director of Universal’s three European subsidiaries which, during his tenure, grew to $20 million in revenues and became the most profitable segment of Universal’s business. Mr. Buys was responsible for implementing Pan-European help desk support while at Universal.

From 1985 until 1990, Mr. Buys served in various positions with Celette S.A., a French manufacturer of automotive repair equipment, including Vice President & General Manager of Celette’s United States subsidiary and later as the executive responsible for the coordination of seven international subsidiaries and a worldwide distributor organization.

Mr. Buys left Xtrasource in 2002.

The Xtrasource companyCurrent locations (situation in 2000)

Xtrasource principal call-centers are based in Raleigh, North Carolina, and Cleveland. They serve the North American market.

In 1996, Xtrasource opened a first call-center in Enschede, in the Netherlands, to serve its clients in Europe.

Moreover, Xtrasource developed activities in Latin America and Asia through two exclusive partnerships:

• with Vermont Serviços de Retaguarda, Ltda. in São Paulo, Brazil

• with Sequel Technology in Chung Ho City Taiwan

The Xtrasource companyEuropean activities expansion

The Enschede call center, started in June 1996, quickly reached 300 employees. In 2000, it appears to Xtrasource that the Dutch Center capacities would be insufficient to face the expected growth. Moreover, the Enshede facility was short in French and Italian speaking operators. This could drive to slow the Firm expansion in Europe.

The company therefore decided to open a new call center that would provide support in a francophone country and started to look for a relevant location, either in Belgium or in France.

The Xtrasource company Project description

1.8 mn euros investment for the new call center

19%

67%

14%

Furniture Hardware Software

The project characteristics are the following:

• Investment: 1,8 mn euros in:– Hardware– Software– Furniture and other equipment

• Opening date: 2001

• Languages: French, Italian, Spanish + Others if possible

• Clients: Philips, Thomson, NEC…

• Employment : hiring of 150 employees (100 FTE) within 3 years

Part 2:

The location

The location:3 main location criteria

In order to find the perfect location, Xtrasource defined a set of criteria that should meet possible locations:

• Employment potential: Call-centers face a high employee turnover, and it is therefore important to have a large potential of employee.

• Language skills: The facility should take calls in French, but also in Italian and Spanish. The proximity of Italian/Spanish border and/or the existence of a high level of emigrates.

• Financial issues: The company is very concerned about set-up costs and operating costs.

The location:From main criteria to sub-criteria

Employment potential

Language skills

Financial issues

Size of the city

Existing competitio

n

Main criteria

Sub-criteria

Public transports

Regional accent ?

Historical immigratio

n

International firms/ research centres

Real estate costs

Public subsidies

Tax incentives

Education

The location:First selection round

According to these criteria, Xtrasource identified 4 potential locations in France and one in Belgium. Selected cities do not exceed 400,000 inhabitants and are located near borders, which generally means more historical immigration. The selected cities are:

• Gardanne

• Grenoble

• Metz

• Montpellier

The location:Second selection round

Menno Buys, European CEO visited suitable location and have extended discussion with cities’ representatives. The table hereafter sum-up his findings

Advantages Drawbacks

Gardanne High level of subsidies

High Italian population

Proposed building too far

Security issues

Grenoble More international firms and RTD centers

No building available

Competition with other CC

Metz High Italian population

Available buildings

Distance from Paris and European Capitals

Montpellier Young population.

High Spanish population

Competition with other CC

The location:Final selection

After having visited all selected cities, Xtrasource chose to set up in Metz, where there is a strong Italian speaking population (mining immigration in the 19th century) and with no competition with other call-centers.

Actually, the city proposed two alternatives location for the call center. The first was in the Technopole de Metz; the second was in Thionville (few miles from Metz) and eligible to the Prime d’aménagement du Territoire (PAT) subsidy.

The PAT, added to regular tax exemptions and hiring subsidies, would have almost covered settlement costs.

However, Xtrasource decided to choose the first proposed location, which offered better public transportations (key factor to attract and keep employees) and a building more adaptable to the Firm’s needs.

Finally, Xtrasource officially announced in July 2001 its decision to set up its new European call center in Metz.

Part 3:

Adaptation to France

Adaptation to FranceHow to deal with constraints in France

Before coming to France, Xtrasource was concerned about the difficulties to manage employees. Unions and strikes were viewed as tangible threats to the effectiveness of the call-center. Moreover, the company was concerned about the lack of commitment of French workers (absenteeism, high turnover…) which was anticipated to be very far from the US or Dutch standards.

                                     

Adaptation to FranceHow to deal with constraints in France

During the settlement phase, Xtrasource discovered some additional difficulties with French administration. France appeared to have numerous subsidies schemes but it was unclear if Xtrasource was eligible to them. All cities in competition made financial offers to Xtrasource that were not comparable since addressing different budgets:

• real estate subsidies,

• equipment subsidies,

• tax cuts,

• hiring grants…

Moreover, once Xtrasource made its decision for Metz, promised subsidies appeared to be difficult to obtain: hiring grants were dedicated to specific people who didn’t fit with what the company needed, it took more than 9 months for local authorities to accept the equipment subsidy application and payment of the granted subsidy took even longer.

Xtrasource was finally happy to have chosen a location not on subsidies criteria but on operational criteria. The firm assess that local and national authorities actually paid half of the initially agreed subsidies.

Adaptation to FranceAdaptations in people management

International transfers

• The Metz call center has been managed since its opening by Emile Koolstra. Emile was one of the first hired persons when Enshede Call-center opened in 1996. He was regularly promoted and was offered to transfer his knowledge and enthusiasm to Metz facility.

Compensation

• Xtrasource had to adapt its compensation scheme to French context. In order to attract and the skilled employees, the firm had to increase substantially proposed wages.

• The company offers services over a large timescale (usually from 6am to 11pm, weekends included), and has to offer much higher compensation for early/late/weekend work than initially forecasted.

• Moreover, it appeared that French employees mostly refused the permanent job offer (CDI) and preferred short time contract (CDD) since it give employee extra-salary and allow to resign more quickly. This situation has driven to tougher workforce planning management.

• This resulted in an hourly rate much higher than the Dutch rate.

Adaptation to FranceAdaptations in people management

Recruitment/Selection

• It finally appeared to be more difficult than expected to hire employees: According to Xtrasource, the French Agency for Employment (ANPE) showed little empathy to assist the company to meet its HR needs and rather focused on proposing to Xtrasource “difficult workers” (“chomeurs de longue durée”, job searchers with hard track record…)

• Xtrasource had to rely on itself for bring potential employees to apply. Unfortunately, a few months after the opening of the Call-center, Bretelsmann also opened a call-center in Metz which increased the scarcity for suitable employees. Xtrasource felt all the more angry about it that the local authorities promised the company that there would not have any competition from other call-centers.

• As a conclusion, the selection process that Xtrasource implemented in Metz is far for the standard in the US or in the Netherlands. It resulted in higher turnover and higher recruitment costs that lower profitability of this facility.

Training

• Training is an important issue since operators have to be aware of product they give support for. Typically, an operator spends 2 weeks in training (know the software and hardware, know the supported products….) and then is cached by an experimented employee for period ranging from 3 weeks to 6 weeks. Hence, training costs are quite important and they are even more important when one consider the high turnover rate.

Key Constraint CostsHR type costs

Concerning the HR type costs, the company evaluate that costs are about 25% higher than in the Dutch facility. These over-costs are mainly due to:

• Higher employment charges

• Higher rate for overtime and/or week-ends/night time

• Higher hiring costs due to scarcity of suitable profiles

• Extra-costs due to high turnover and extra-training.

Moreover, the company had extra-costs related to the international transfer of the current facility manager from Enschede to Metz.

Key Constraint CostsOther organization structure costs

• Real estate costs are similar with the Dutch facility.

• Travel expenses are higher since poor transportation facilities between Metz and main European cities (Paris, Brussels, Amsterdam…)

• Taxes are in line with what the company expected. However, it had some difficulties to fully understand fiscal exemption schemes like “credit d’impôt recherche”

• Communication costs are an important budget item (the company offers toll-free calls to its clients’ customers, both European facilities are permanently connected to smoothen the workload…) but the company managed to negotiate interesting tariffs.

• Language was not a constraint since most of European managers speak fluent French and because hired people are selected because they have languages skills.

Conclusion

Essential Advice

Do not underestimate the behavioral differences between the French and the rest of the world. Service and commitment do not have the same meaning here.

Do not base your location choice on public subsidies: Local and national authorities cannot commit themselves until you actually set up the company, and then you are tied-up if authorities finally decide not to grant your project

Think about hidden costs such as overtime costs, travel costs…

…but the investment in France is worth it

We Thank

We strongly and warmly thank the Xtrasource team in Metz and Enschede for the help and input with this case study.

Our Team: ES2a

ES2a is:

• Chin Hwee ONG

• Francisco BOULOT

• Gouri Shankar VEMALI

• Mitch PENDER

• Sylvain GOUPILLE

HEC MBA 2005

Best in France