Study on Industrial Policy and Services

Within the Framework Contract of Sectoral Competitiveness Studies – ENTR/06/054

Final Report – Part II

Client: Directorate-General Enterprise & Industry

Paul Baker – Study Team Leader Nora Plaisier Saara Tamminen Isabelle de Voldere

Rotterdam, 5 November 2008

Disclaimer: The views and propositions expressed herein are those of the experts and do not necessarily represent any official view of the European Commission or any other organisations mentioned in the Report

ECORYS Nederland BV P.O. Box 4175 3006 AD Rotterdam Watermanweg 44 3067 GG Rotterdam The Netherlands

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ECORYS Macro & Sector Policies T +31 (0)31 (0)10 453 87 53 F +31 (0)10 452 36 60

Study on Industrial Policy and Services

Preface

This Final Report has been produced as part of the “Study on Industrial Policy and Services” commissioned by the European Commission Directorate General for Enterprise and Industry, within the context of the framework contract on Sector Competitiveness Studies (ENTR/06/054). The Final Report is published in two parts. The first part, covered in a separate document, provides the main background analysis of industry-service interactions and cross-cutting policy themes and issues, together with the Executive Summary. The second part, which is covered in this document, provides a review of six selected service sectors that are heavily used by industry, together with a synthesis of the main findings from the sectoral analysis. The analysis contained in the Report has been undertaken by a team of consultants from ECORYS Netherlands and IDEA Consult under the direction of the Team Leader, Paul Baker. The project team has been supported by three external experts: Prof. Ian Miles (Manchester Institute of Innovation Research), Prof. Luis Rubalcaba (University of Alcalá, and President of the European Association for Service Research, RESER) and Henk Kox (CPB – Netherlands), who have provided guidance and advice.

Study on Industrial Policy and Services

Table of contents

1 Overview 1.1 Introduction 1.2 Selection of sectors 1.3 Statistical overview of selected sectors 1.4 Screening of framework conditions 1.5 Screening against policy initiatives 2 Industrial Cleaning 2.1 Sector overview 2.2 Competitiveness analysis 2.2.1 Labour supply, costs and conditions 2.2.2 Apparent labour productivity 2.2.3 Productivity enhancement 2.2.4 Demand side conditions 2.2.5 Competition and business strategies 2.2.6 Internationalisation 2.3 Screening of regulatory and other framework conditions 2.3.1 Regulatory conditions and standards 2.3.2 ‘Other’ framework conditions 2.3.3 Exogenous conditions and trends 2.4 Overview of potential policy issues 2.4.1 Key arguments for policy intervention 2.4.2 Screening against policy initiatives 3 Security Services 3.1 Introductory comments 3.2 Sector overview 3.2.1 Main sector characteristics 3.3 Competitiveness analysis 3.3.1 Labour supply, costs and conditions 3.3.2 Apparent labour productivity 3.3.3 Productivity enhancement 3.3.4 Demand side conditions 3.3.5 Competition and business strategies 3.3.6 Internationalisation 3.4 Screening of regulatory and other framework conditions 3.4.1 Regulatory conditions and standards 3.4.2 ‘Other’ framework conditions 3.4.3 Exogenous conditions and trends
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1 1 2 3 7 13 15 15 16 16 17 19 19 20 21 21 22 23 24 25 25 27 41 41 41 41 43 43 43 44 45 46 47 47 47 49 51
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3.5 Overview of potential policy issues 3.5.1 Key arguments for policy intervention 3.5.2 Screening against policy initiatives 4 Private employment agencies 4.1 Sector overview 4.2 Competitiveness analysis 4.2.1 Labour supply, costs and conditions 4.2.2 Apparent labour productivity 4.2.3 Productivity enhancement 4.2.4 Demand side conditions 4.2.5 Competition and business strategies 4.2.6 Internationalisation 4.3 Screening of regulatory and other framework conditions 4.3.1 Regulatory conditions and standards 4.3.2 ‘Other’ framework conditions 4.3.3 Exogenous conditions and trends 4.4 Overview of potential policy issues 4.4.1 Key arguments for policy intervention 4.4.2 Screening against policy initiatives 5 Engineering and technical consulting services 5.1 Sector overview 5.1.1 Statistical overview (Architectural and engineering activities and related technical consultancy; technical testing and analysis) 5.2 Competitiveness analysis 5.2.1 Labour supply, costs and conditions 5.2.2 Apparent labour productivity 5.2.3 Productivity enhancement 5.2.4 Demand side conditions 5.2.5 Competition and business strategies 5.2.6 Internationalisation 5.3 Screening of regulatory and other framework conditions 5.3.1 Regulatory conditions and standards 5.3.2 ‘Other’ framework conditions 5.3.3 Exogenous conditions and trends 5.4 Overview of potential policy issues 5.4.1 Key arguments for policy intervention 5.4.2 Screening against policy initiatives 6 Logistics services 6.1 Sector overview 6.1.1 Statistical overview (Cargo handling and storage; other supporting transport activities; activities of other transport agencies) 6.2 Competitiveness analysis 6.2.1 Labour supply, costs and conditions 6.2.2 Apparent labour productivity 6.2.3 Productivity enhancement

51 51 53 65 65 67 67 68 69 70 71 72 73 73 74 76 77 77 79 97 97 98 99 99 100 100 101 102 103 104 104 105 108 109 109 110 121 121 124 125 125 125 126

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6.2.4 Demand side conditions 6.2.5 Competition and business strategies 6.2.6 Internationalisation 6.3 Screening of regulatory and other framework conditions 6.3.1 Regulatory conditions and standards 6.3.2 ‘Other’ framework conditions 6.3.3 Exogenous conditions and trends 6.4 Overview of potential policy issues 6.4.1 Key arguments for policy intervention 6.4.2 Screening against policy initiatives 7 Computer related services 7.1 Sector overview 7.1.1 Statistical overview (Computer and related activities) 7.2 Competitiveness analysis 7.2.1 Labour supply, costs and conditions 7.2.2 Apparent labour productivity 7.2.3 Productivity enhancement 7.2.4 Demand side conditions 7.2.5 Competition and business strategies 7.2.6 Internationalisation 7.3 Screening of regulatory and other framework conditions 7.3.1 Regulatory conditions and standards 7.3.2 ‘Other’ framework conditions 7.3.3 Exogenous conditions and trends 7.4 Overview of potential policy issues 7.4.1 Key arguments for policy intervention 7.4.2 Screening against policy initiatives 8 Facilities Management 8.1 Introduction 8.2 Facilities management – terms and definitions 8.2.1 Different views on facilities management 8.2.2 Facilities Management sector: different players 8.3 Demand side conditions 8.4 Supply side opportunities 8.5 Future challenges in total facilities management 8.6 Potential policy implications

127 129 130 131 131 133 135 136 136 137 147 147 148 149 149 149 150 150 152 153 154 154 156 160 161 161 162 173 173 173 173 174 175 177 177 178

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1 Overview

1.1

Introduction
This report has been produced as part of the study “Study on Industrial Policy and Services” commissioned by the European Commission Directorate General for Enterprise and Industry, within the context of the framework contract on Sector Competitiveness Studies (ENTR/06/054). Specifically, the report aims to provide an overview of six business services sectors, selected in consultation with DG Enterprise, that would provide a starting point for assessing the possible scope and diversity of sectoral issues and industry-service inter-linkages that may warrant further attention from the perspective of EU industrial policy. In accordance with priorities established between the consultants and DG Enterprise, the agreed focus for the analysis of the selected service sectors was as follows: • An assessment of the competitive position of selected service sectors and their contribution to the competitiveness of client (industry) sectors, including: - Structure and segmentation of the sector and markets; - Performance evaluation and identification of the main drivers and inhibiting factors for competitiveness; - Important trends (at EU and global level) shaping, or expected to shape, development of the sector. The purpose was to provide a brief overview of the main features of the selected service sectors within the EU and to identify and summarise their main performance indicators and competitiveness drivers. Further, it was the intention to examine the main trends in areas such as global competition, developments within the EU internal markets and productivity performance. • An assessment of regulatory and other framework conditions for the sector and the impact of (actual or potential) policy issues, including: - Identification of potential market failures and other possible problems affecting the business environment for EU service providers; - Assessment of key issues and priorities related to the regulatory environment or ‘other’ framework conditions for which there may be a role for EU-level policy initiatives; - Screening and prioritisation of sector issues against existing (or potential) EU policy initiatives. The purpose was to develop framework profiles for the selected service sectors, together with policy profiles. In turn, these profiles provide a starting point for assessing the extent to which the different service sectors are (actually or potentially) affected by various EU-level policy initiatives and measures and the implications for industry-service interactions.

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1.2

Selection of sectors
The selection process, conducted in collaboration between the consultants and representatives of the European Commission DG for Enterprise and Industry, has been based on a number of key attributes seen to be relevant from an economic and policy perspective, which were placed alongside the requirement to have a contrasting set of sectors in the final selection. The key attributes were: • Contribution to overall production costs for industry (Input-Output (I-O) analysis); • Potential role in knowledge diffusion and innovation; • Characterisation of the sector / service activity, e.g.: - Manual (tangible) versus knowledge (component); - Relative labour versus capital intensity; - Standardisation versus customisation of services provided; [These underlying characteristics can also be linked to other characteristics such as: possibility for choice over external versus internal provision, open versus closed production processes, and amenability to digital delivery and other technological developments, etc.] • Relationship with and relevance to key economic challenges (globalisation, technological change, environment, demographic change); • Existing EU policy initiatives. With regard to the final point (existing EU policy initiatives), it was agreed that the study would not address those sectors – mainly network-type sectors – such as transport, telecommunications, finance and insurance and distribution that are already the focus of significant EU-wide policy initiatives, albeit initiatives mainly outside the domain of industrial policy. On the basis of the selection process, the following broad service sectors were identified as candidates for incorporation in the second phase of the study: Knowledge-intensive Business Services (KIBS) sectors • Computer and (non-standardised) software services; • Engineering and technical services; These sectors are characterised (in general terms) by their knowledge intensity, relative capital intensity, and high degree of specialisation. As such, they are associated with their positive contribution to user performance in terms of their effects on technological change and their innovation role and, in turn, the challenges posed by globalisation (e.g. digital delivery and international outsourcing, etc.) Operational Business Services (OBS) sectors • Industrial cleaning; • Private security services; • Recruitment and temporary employment. These sectors are characterised by the relative importance of manual processes and labour intensity and are typically perceived as having low levels of specialisation. Proximity (physical presence) for delivery of services is of obvious importance, as is the emphasis on cost reduction as a motivation for externalisation of service provision. They are also

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associated with potentially significant impacts from the development of the Internal Market and accompanying harmonisation of regulations and standards. The sectors are also of interest in terms of the developing provision of integrated multiple services solutions (i.e. facilities management). Network-related sector • Logistics. Transport services are among the most important service-related cost items for many manufacturing sectors (notably capital and intermediate products), and of growing importance for many other sectors where flexibility, rapidity and internationalisation of sourcing and supply chains is a key factor in competitiveness. In this context, although it is beyond the scope of the study to cover transport services per se, the provision of logistics services has been included as it is associated with a fundamental role in efficient and effective management of a key area of industry-service interaction.

1.3

Statistical overview of selected sectors
Table 1 provides an overview of the main characteristics of the sectors, as described by available and comparable statistical data. In analysing these data, it needs to be recognised that there are often limitations in existing statistical classifications that make it difficult to identify precisely the business service activities/sectors that are covered, notably for engineering and technical consulting, logistics and those computer related activities that are primarily related to services (as opposed to product based). Furthermore, as is shown in the individual sector chapters of this report, there is considerable heterogeneity across Member States, such that European aggregates may mask important differences between countries. At the same time, it is not the purpose of this analysis to provide precise sector or national data but, rather, to identify broad patterns across and within sectors and countries. As a starting point, Table 1 reveals the economic importance of the selected sectors within the European economy in terms of employment, turnover and value added, based on Eurostat data1. The smallest sector is private security services, with an estimated 1.2 million workers and a turnover of €35 billion, while the largest sectors, in terms of employment, are private employment agencies with 3.3 million workers2 and industrial cleaning 3.0 million workers. The largest sectors in terms of turnover and value added are logistics (turnover: €353 billion, value added: €130 billion)3 and computer and related services (turnover: €331 billion, value added: €167 billion).

1

2

3

In general, Eurostat data are broadly in line with data obtained from sector associations. Where such data is available, it is reported in the sector chapters. Of which, it is estimated roughly 250 thousand are ‘internal’ workers of private employment agencies and the rest are temporary agency workers. Data refer to the NACE category cargo handling and storage; other supporting transport activities; activities of other transport agencies (63.1 + 63.2 + 63.4)

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An indication of the relative labour intensity of each sector is provided by the variable ‘share of labour in production’4. This shows the high relative labour intensity of the three operational business service (OBS) sectors: industrial cleaning (59%), private security services (60%), and private employment agency services (63%)5. The difference between turnover per worker and value added per worker provides an indication – albeit rather approximate - of the relative importance within the output of the sector of ‘other goods and services’ that are provided alongside labour services. For the three OBS sectors, the ratios of value-added per worker to turnover per worker are relatively high (68-76%) compared to architectural, engineering and technical consulting (50%) and logistics (37%). The variable ‘wage-adjusted labour productivity’ is calculated by dividing the value added per worker by the average personnel cost per employee6. It provides, therefore, an indication of the relative average productivity of workers in the sector, in terms of the extent (%) to which the value added created exceeds the cost of labour. The lowest wageadjusted labour productivities are in industrial cleaning (115%) and private security (116%), although, the difference between these sectors and the other sectors – with the exception of logistics – are perhaps not so great as could be expected a priori. The sector that stands out in this regard is ‘logistics’, for which the wage-adjusted labour productivity is estimated at 175%. This partly reflects the low labour intensity of the sector and also – although not explicitly estimated from the data – we can assume the high level of capital utilised in production. The subsequent three rows of data provide estimations of the role of larger firms in the sector and, thus, provide some indication of concentration in the sector. The number of enterprises represents (approximately) the sum, across countries, of the number of enterprises with more than 250 employees and the proportion of total turnover and employment accounted for by these enterprises. On this basis, the sector with the lowest concentration in terms of shares of turnover (21%) and employment (14%) of ‘large’ enterprises is the architectural, engineering and technical consulting services sector. This can be contrasted with private employment agencies, where ‘large’ firms account for 65% of turnover and 70% of employment. The data on turnover per worker and value-added per worker by enterprise size attempt to provide some indication of the possible importance of enterprise size and, therefore, possible economies of scale for the different sectors. What we can see is that average production and value added per worker – a standard measure of labour productivity - is negatively related to size for the sectors of industrial cleaning, private security and private employment agency services7. By contrast, there seems to be a positive relationship for
4

5

6

7

Defined as the share of personnel costs in the value of production. Note that this does not include remuneration to the ‘owner’/entrepreneur where this is included under operating surplus rather than personnel costs. This can be important in sectors characterised by a high proportion of micro-enterprises. This labour intensity can also be seen by comparing the relative size of average personnel costs per employee to turnover per worker for each sector. A value of 100 would indicate that the average value-added (which includes the cost of labour) created is exactly equal to the average cost of labour in the sector. Some caution is necessary in the interpretation of labour productivity data for the private employment agency (PrEA) sector since, to a large extent, variables such as turnover, value-added and personnel costs will reflect the financial remuneration and other labour costs associated with the provision of temporary agency workers. To the extent that the composition of

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the other sectors, although the importance of scale effects for architectural, engineering and technical consulting services and ‘logistics’ service does appear to depend on whether turnover or value-added per worker is considered. The interpretation of these data depends upon the point of view taken with regard to whether the ‘outputs’ from these sectors are considered as cost-critical inputs to other forms of economic activity, or as value-added generating activities in their own right. Typically, it is the latter approach which is taken when assessing ‘competitiveness’, so that high apparent productivity (e.g. high levels of value-added per worker) is seen as a positive attribute. In the case of the three OBS sectors, however, these are typically viewed in terms of the former (i.e. cost items), such that low turnover or low value-added per worker can be viewed as a reflection of cost-competitiveness. In this respect, the observed differences across firm size categories can also tell us something about the relative ‘efficiency’ of firms, whereby larger firms are able to benefit from ‘economies of scale’, such as lower management overheads or more efficient organisation of business/service processes8. By contrast, for architectural, engineering and technical consulting services and computer-related services, which would be classified as knowledge-intensive business services and ‘generators’ of value-added in their own right, we can perhaps take a more ‘traditional’ view of apparent productivity performance. This would then suggest that there is some evidence that larger firms are more ‘competitive’ in that they are able to achieve higher production and value-added per worker than smaller enterprises. Finally, the situation in the ‘logistics’ sector, in terms of the impact of enterprise size on productivity performance, probably warrants more detailed assessment. On the one hand, the data suggest that small firms achieve significantly greater levels of production per worker than larger companies, but, on the other hand, value-added per worker is higher for firms with more than 250 employees than for the other size categories. The final rows of data simply calculate the ratio of value-added per worker to turnover per worker (i.e. the ratio of the two preceding sets of data) by enterprise size. Here we can look at the proportion of value-added in the turnover of the sector, which can provide a further indication of the relative efficiency of services production. For the three OBS sectors and ‘logistics’, the proportion of value-added in turnover is shown to increase with company size9. For the remaining sectors, the share of value-added in turnover is lower for enterprises with over 250 employees than for the smaller enterprise size categories.

8

9

skill-levels (and corresponding wage levels) of temporary agency workers varies across countries then this will be reflected in relative levels of personnel costs and, correspondingly, value added of the PrEA sector. This conclusion may be seen to be somewhat weaker for the PrEA sector in relation to those segments/companies that are dealing with the provision of specialised/skilled temporary agency workers, where ‘quality’ competitiveness may be more important than cost competitiveness (e.g. higher value-added per worker may reflect higher ‘quality’ of workers supplied). Although for private employment agencies the ratio is the same for both enterprises with 50-249 employees and 250+ employees. Here some caution is required, since the categorisation by ‘employee’ size would seem to depend on the number of agency workers and not the number of internal staff of the enterprises.

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Table 1

Overview of European services sector characteristics
Industrial Cleaning Private Security Private Employment Agencies Architectural, Engineering & Technical Consulting Number of thousand companies Number of thousand workers Turnover Value-added Share of labour % in production Turnover per € 1000 worker Value-added € 1000 per worker Personnel cost € 1000 per employee Wage adjusted labour productivity Enterprises with 250 or more employees Number of number enterprises Share of sector % turnover Share of sector % employment Turnover per worker by enterprise size (number of employees) 2-49 emp. 50-249 emp. 250+ emp. € 1000 € 1000 € 1000 30 20 19 38 25 21 42 31 27 87 116 137 191 140 141 91 125 167 51 58 70 14 46 31 44 48 65 21 41 44 1440 620 460 890 860 770 € 1000 115 116 120 121 175 126 13 18 21 40 35 50 15 21 26 48 61 63 22 31 34 96 166 126 59 60 63 32 23 38 € billion € billion 66 45 35 25 111 84 248 124 353 130 331 167 2,960 1,160 3,280 2,580 2,120 2,640 160 50 70 860 110 510 Logistics (handling, storage, & support) Computer & related activities

Value-added per worker by enterprise size (number of employees) 2-49 emp. 50-249 emp. 250+ emp. € 1000 € 1000 € 1000 19 14 14 19 17 16 25 24 21 44 58 60 49 45 67 43 60 77

Ratio of value-added per worker to turnover per worker by enterprise size (number of employees) 2-49 emp. 50-249 emp. 250+ emp. % % % 63 70 76 51 69 74 61 80 80 51 50 44 26 32 48 48 48 46

Source: author’s estimates based on Eurostat data

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1.4

Screening of framework conditions
One of the key aims of the sector analysis was to identify and prioritise key issues facing each sector both in terms of the sector’s own development, and in terms of interactions between the sector and its clients - specifically those in industry (manufacturing). This analysis is centred on a screening of the sector in relation to a set of main regulatory and framework conditions. The results from these screening exercises, in terms of the relative importance of different factors for each sector, are shown in Table 2 and Table 3. In this section, we attempt to summarise some of the main findings and draw some comparisons across the sectors covered by the analysis. Regulatory measures and standards Differences in national regulatory measures play a very important role in shaping the development of all the service sectors covered by the study. One clear theme is the way in which the nature and stringency of national regulations act as barriers to entry or shape possibilities for firms to achieve economies of scale. Striking the right balance between genuine concerns over the possible negative consequences of unregulated development of service activities and the potential barriers to entry resulting from (over) stringent regulation is a common theme that arises. The effects of stringent regulations that place limitations on the types of activities that services providers are allowed to offer, or that entail high compliance costs, are clearly reflected in the levels of concentration and consolidation observed in national markets. For example, in both the private security sector and the temporary employment services market, countries with high levels of national regulation are characterised by much higher degrees of market concentration. By contrast, stringent national regulations on who can perform technical consulting services in some Member States appear to have the opposite effect, by creating an entry barrier to these national markets for international competitors and restraining the development of larger companies. The positions of industry associations to current regulatory environments differ, however. For example, whereas private employment agencies are generally in favour of greater market liberalisation, the priority issue for the private securities service sector is to ensure that requirements are raised in those Member States where security service providers are subject to very low levels of regulation. For both these sectors, which are currently not included within the Services Directive, greater European harmonisation of sector regulations – and eventually completion of Internal Market rules – are seen as important. Labour regulations (e.g. working conditions) and labour taxes and social security are also of particular importance for those sectors that are labour intensive, especially in terms of low-skilled workers. While other tax issues and fiscal regulations (e.g. environmental taxes) are important for the logistics sector in terms of, for example, their influence on location decisions of transport and distribution centres. Industry and professional standards – including voluntary industry standards and codes of practice – is an area where many of the sectors are active. To a large extent, the development of industry standards for business services is at a relatively rudimentary stage and it is only recently that national and international standards organisations have turned their attention to standards in this area. In addition to the development of standards

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(e.g. codes of conduct etc.) governing the activities of service providers themselves, a number of sectors have been, or are currently, active in developing ‘best practice’ guides for the procurement of their services (e.g. industrial cleaning, security services, engineering consulting). These are seen as a way of ‘educating the client’ and encouraging clients – particularly where cost-cutting pressures within clients themselves is high – to pay greater attention not only to price-based procurement but also to the quality aspects of service provision. Other framework and ‘exogenous’ conditions Labour force and skills and the inter-linkage with underlying demographic change are an area where all sectors report important challenges. On the one hand, for ‘low-skilled’ labour-intensive service sectors, a shrinking active labour force can be seen to present a problem for securing a sufficient volume of labour, particularly where the work itself may be associated with relatively unsocial or poor working conditions and is seen as unattractive. To some extent, for example, this is reflected in the prevalence of minority and (im)migrant labour in sectors such as industrial cleaning. Here, raising standards and increasing training and skills involves not only efforts to increase the professionalism and quality of services provision, but is also seen as an element in increasing the attractiveness of the sector to potential workers, by enhancing prospects for career development, for example. On the other hand, shortages of workers with specific skills are a major concern for knowledge-intensive sectors, such as computer related services, and engineering and technical consulting. These sectors face external challenges from countries with a growing stock of technically-skilled workers (e.g. engineers, ICT professionals, etc.), which increase the potential viability of off-shoring activities. In addition, tight conditions in local labour markets mean increased competition from other sectors that may be able to offer more attractive terms and conditions to workers. For private employment agencies sector, which can be seen as an intermediary in the process of labour supply and demand matching, the increasing difficulty that their clients face in recruiting skilled and specialised workers is reflected in the fact that this is the fastest growing segment of the employment agency business in Europe. In this respect, demographic change and changing skills needs and availability represent important opportunities for the sector. At the same time, existing national regulation and restrictions on the use of temporary agency work are important for the sector – and their clients – in shaping national skills profiles of temporary agency workers. Skills shortages are also reflected in the discussion of knowledge and innovation issues, specifically in sectors that are heavily reliant upon knowledge skills to drive innovation and, in turn, productivity developments. Among the sectors covered in the study, this is most obvious in the case of sectors such as engineering and technical services and the more skilled (typically ICT-related) segments of logistics services. A key aspect is the growing complexity of services being requested by clients, which results in an expanding scope of knowledge and skills requirements, including management and organisational capacity to handle complex projects. At the same time, increased client pressure to reduce costs, low margins and the prevalence of small companies – particularly in engineering

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and technical services – all mean that firms within these sectors face considerable constraints in investing in R&D and innovation. R&D and innovation is also an issue in the technical development of equipment and systems associated with non-KIBS sectors, such as security services and even industrial cleaning. Here, an important aspect to the knowledge and innovation equation rests on the relationships between the providers of equipment, materials and systems and the service providers themselves. There appears to be scope for strengthening linkages between equipment manufacturers, service providers and, ultimately, service clients in order that both technological and organisational innovations can make a greater contribution to enhancing the efficiency and effectiveness of service provision. Market access issues for the sectors covered by the study are related, by and large, to issues of diversity in national regulatory systems and restrictions (see above). High compliance costs, for example, can be major impediments to the internationalisation of service activities, particularly where proximity to clients and, hence, establishing a local presence (e.g. through FDI) is necessary for successful international development. The study has not assessed in any depth market access issues related to markets outside Europe. These are, perhaps, of most importance for the logistics sector, where they are linked very closely to liberalisation of transport markets, trade facilitation measures (e.g. customs procedures, inspections etc.) and restrictions on FDI in the transport sector. Slow progress in multilateral negotiations on trade facilitation is seen as an important impediment to further development of the logistics sector. Structural change is considered as an important issue for all of the sectors covered by the study. To a large extent this reflects the role played by these sectors in the externalisation process (e.g. outsourcing and off-shoring etc.), which provides an important driver of growth for the sectors. We can also observe a specific role for private employment agencies in assisting business in adapting to structural change and changing labour requirements and an increased need for private security services, as a result of greater fragmentation of value chains. At the same time, structural change is also taking place within service sectors themselves. One aspect is related to the greater segmentation of services markets and providers, reflected in consolidation among major players and ‘niche’ strategies pursued by smaller firms and new entrants. In addition, expanding the scope of services provided and the development of multi-service and ‘one-stop shop’ approaches, such as the development of facilities management services, is a further feature of the structural change taking place in the business services sector. The report has examined some limited aspects of possible competition policy issues within the sectors covered. One aspect, mentioned above, is the role played by regulations in shaping the structure of national service markets. For example, very high levels of concentration are observed in some national markets for operational business services. Whether these may give rise to competition concerns has not been assessed and, moreover, to do so would necessitate more in-depth examination of the correspondence between market segmentation on both the supply-side and demand-side. From the perspective of international and global competition, there are important differences in potential competition pressures. For all three OBS sectors, provision of services requires close geographical proximity to clients and, therefore, international (global) competition

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per se is of limited relevance, except where foreign firms establish themselves in local markets. For engineering and technical consulting and logistics, global competition is an important factor in the development of the market. For example, the engineering consulting services sector is already seeing some activities being outsourced to lower cost regions, such as India, where there is a plentiful supply of engineers. Meanwhile, global competitors are starting to become more present even in European markets. For logistics, Chinese companies are becoming increasingly important competitors in the sector and, closer to home, an additional challenge comes from the increasing attractiveness of Eastern Europe as a location for logistics activities both due to lower costs and the growth of markets in the region

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Table 2

Sector screening of framework conditions: relevance for conditions and development of service sectors Regulatory & ‘other’ framework conditions Heading Item Industrial Cleaning Services National regulatory measures EU regulatory measures Regulatory conditions Completion of internal market legislation Industry and professional regulations and standards Knowledge: R&D, innovation and product/service development Labour force, ‘Other’ framework conditions knowledge and skills Market access (trade and investment) Structural change Competition policy issues Technological change Exogenous conditions Social and demographic change Global competition No or limited relevance Relevant Important Very important Security Services Employment Services Engineering & technical Services Logistics services Computer related services Sector

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Table 3

Sector screening of framework conditions: relevance for industry-service inter-linkages Regulatory & ‘other’ framework conditions Heading Item Industrial Cleaning Services National regulatory measures EU regulatory measures Regulatory conditions Completion of internal market legislation Industry and professional regulations and standards Knowledge: R&D, innovation and product/service development Labour force, ‘Other’ framework conditions knowledge and skills Market access (trade and investment) Structural change Competition policy issues Technological change Exogenous conditions Social and demographic change Global competition No or limited relevance Relevant Important Very important Security Services Employment Services Engineering & technical Services Logistics services Computer related services Sector

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1.5

Screening against policy initiatives
Table 4 provides an overview of the screening of each of the service sectors covered by the sector against existing and potential horizontal EU ‘industrial’ policy issues and a number of additional possible services-related initiatives. Among the policy initiative areas that stand out, in terms of across the board relevance for the sectors covered by the study, are the themes of ‘better regulation and simplification’ (with particular reference to greater harmonisation of EU regulatory policies and frameworks) and ‘other standards’ (with particular reference to the development of European definitions and standards, professional standards and training, and ‘best practice’ guidelines). As noted in the main report of this study, standardisation within services activities is increasingly being used to promote best practices, to spread knowledge throughout the market and to set benchmarks, against which businesses can measure the quality and performance of their own services or the services they are purchasing (thus improving competitiveness and increasing efficiency). By and large, both with respect to quality and technical standards, the business services industry lags far behind manufacturing, both in terms of the adoption of such standards and in their international harmonisation. To date, efforts to define and develop consensus on the potential role of standards in the business services sector have had relatively limited visibility. As a consequence, international efforts towards the development of service standards for business services are at an early stage and appear to being developed on the basis of a rather piecemeal approach. A second policy area that seems relevant across all sectors covered by the study relates to ‘employment, qualifications, skills and flexicurity’. Improving skills levels, raising professional standards and addressing labour or specific skill shortages are raised as issues for business services. There is also a link here to ‘organisational innovation’ and the possibilities to enhance sector performance through improvements in the organisation of business services labour-based processes. A second aspect of ‘services innovation’ relates also to enhancing the interface between service providers and clients, particularly – but not only – in relation to more knowledge-intensive service activities. More traditional forms of services innovation (i.e. through new service product innovations) are also important for improving performance and competitiveness in these sectors. However, ‘support for knowledge intensive business services’ is only shown to be of major relevance for the engineering and technical consulting services sector.

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Table 4

Sector screening of policy initiatives: actual or potential relevance of initiatives for the sector Heading Initiative
Industrial Cleaning Services Trade policy Trade Proper functioning of the IM Public procurement Competition policy Better regulation Better regulation and simplification Technical standards Other standards Health and safety Research and development Intellectual property rights Knowledge and skills Innovation policy Employment, qualifications, skills / Flexicurity Access to finance / risk capital Waste, water, air Energy and environment Intensive energy use Organisational and services innovation Support for knowledge intensive business services Services Measurement and recognition of intangible assets Regional actions (demand and supply matching) No or limited relevance Relevant Important Very important Security Services

Relevance
Employment Services Engineering & technical Services Logistics services Computer related services

-

-

-

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2 Industrial Cleaning

2.1

Sector overview
Estimates from both the European Federation of Cleaning Industries (EFCI)10 and Eurostat provide a broadly similar picture of the size and economic importance of the industrial cleaning sector in Europe. For 2005, EFCI estimates based on data from 19 national member associations11 indicate that the total turnover of the sector was € 50.1 billion; with the sector encompassing some 122 thousand companies and employing 3.4 million workers (see Figure 1 to Figure 3). For the same year, Eurostat estimates, which cover 26 countries12, indicated total turnover of € 65.6 billion, 158 thousand companies, and 3.0 million workers (see Figure 4 to Figure 6). The industrial cleaning sector accounts for approximately 0.3% of total turnover, and 2.4% of total employment in the non-financial and non-utility business economy (NACE Sections C, D, F to I and K)13 as shown in Figure 7 and Figure 8. These data suggest that the industrial cleaning sector accounts for a relatively low proportion of the business economy in New Member States, which would seem to be indicative of lower levels of outsourcing of cleaning services and development of the industrial cleaning sector compared to ‘older’ Member States. According to EFCI estimates, the increasing demand for the services of industrial cleaning contractors has seen turnover – unadjusted for inflation - double over the last 10 years (from € 24.4 billion in 1995), while employment has increased by 1.3 million (from 2.11 million in 1995). Although overall demand for cleaning services is linked to the level and growth of economic activity, the main driver of growth for the industrial cleaning services sector has been the continuing trend towards outsourcing of cleaning services previously undertaken ‘in-house’. EFCI estimates that market penetration – defined as the share of global cleaning services (i.e. in-house plus outsourced) contracted out to specialised cleaning companies – was at a level of about 61% in 2005 for the EU as a whole. As shown in Figure 9, however, there is quite some difference across countries in terms of both penetration rates and the change in these rates over time.

10 11

12

13

EFCI (2007) “The Cleaning Industry in Europe: An EFCI Survey”, Edition 2007 (Data 2005) Austria, Belgium, Czech Republic, Germany, Denmark, Spain, Finland, France, Hungary, Italy, Luxembourg, Norway, Netherlands, Poland, Portugal, Slovenia, Slovakia, Sweden and United Kingdom. As for EFCI, excluding Czech Republic and including: Bulgaria, Cyprus, Estonia, Greece, Ireland, Latvia, Lithuania and Romania. More normally the non-financial business economy (NACE Sections C to I and K) is utilised as a reference, but as data on the ‘utilities sector’ (NACE Section E) is missing for some countries the definition ‘non-financial and non-utility business economy’ has been used.

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In terms of the breakdown of activities (see Figure 10), office cleaning is by far the most important segment and accounts for over half of turnover; cleaning of industrial sites and for the agri-food sector account for around 13 percent of total turnover. Although office cleaning remains the core activity of cleaning contractors, other activities have been growing in importance and there is a growing tendency towards diversification into integrated services and facilities management. This tendency, which reflects changing client needs and expectations, is increasingly influencing the strategic and operational planning of firms within the sector. In turn, the accompanying need to adapt professional competences of workers has become a strategic challenge for the sector. The firm structure of the sector is characterised by a prevalence of small companies. EFCI data indicate that three-quarters of firms within the sector employ less that 10 persons. These estimates would seem to be confirmed by Eurostat data that indicate that nearly 50% of companies in the sector have only 1 employee, and a further 35% of companies have between 2 to 9 employees (see Figure 13). These small companies, however, typically account for a relatively small proportion of total turnover and employment. EFCI assesses that those companies employing more that 500 persons (approximately 1.5 % of total firms) account for around half of total turnover in the sector; while Eurostat data indicate that firms with 250 or more employees account for around 44% of total turnover (Figure 14) and over 50% of employment (Figure 15).

2.2
2.2.1

Competitiveness analysis
Labour supply, costs and conditions Cleaning is highly labour intensive, with personnel costs typically accounting for 75-80% of total costs. Accordingly, wage costs, labour taxes and social security payments are the main drivers of costs in the sector; which implies that costs are a priori higher in countries with higher wages and tax systems. In a market that is typically characterised by price-based (cost-saving driven) demand, there is an obvious tension between pressure to hold down wages on the one hand, and to provide reasonable remuneration and working conditions for employees on the other. This challenge can be set against, and is exacerbated by, known problems of ‘grey market’ and illegal activities of some service providers for whom reducing labour costs provides the motivation to circumvent tax, social security and working condition requirements (see Section 2.2.5). The prevalence of relatively low-paying jobs within the sector and the part-time nature of the work - 70% of employment in the sector is estimated to be part-time work (see Figure 11) - combined with the relatively poor image of the sector, contribute to problems in the retention of workers (i.e. high staff turnover). In addition, underlying demographic change, which influences the size of the pool of potential workers for the sector, is already seen to be a possible cause of staffing problems for the sector. At the same time, though jobs in the sector are mainly low-skilled, the sector can be seen to play a ‘social role’ in terms, for example, of inclusion of immigrants into the workforce. Overall, it is recognised that there is a need to make the sector more attractive to employees. Initiatives in this direction would encompass better management of workers in general, improving the level and recognition of professional standards of workers, changes to working

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patterns (e.g. more full-time and day-time working), and also in terms of supporting infrastructure (e.g. transporting workers) and technology. One characteristic of the sector is that services are performed predominantly outside ‘normal’ working hours (i.e. usual occupation period of the premises). Daytime cleaning tends to be the exception, though as shown in Figure 1214 it is more prevalent in Scandinavian countries (Sweden, Denmark) and Central Europe (Poland, Czech Republic). Increasing the proportion of daytime working is seen as one possible avenue for increasing the attractiveness of the sector for potential workers by offering greater opportunities for full time work and consequently improved professionalism (e.g. easier access to professional training), employee motivation and recognition, as well as a better balance between private and working life. Despite technical developments (e.g. cordless and silent vacuum cleaners) there is, however, reluctance on the part of clients to accept solutions including daytime cleaning15. 2.2.2 Apparent labour productivity EFCI estimates indicate that average turnover per worker in the cleaning sector was approximately € 18.2 thousand in 2005 (see Figure 16). On the basis of Eurostat data excluding from the calculation enterprises with only 1 employee – the estimated average turnover per employee is approximately € 22.1 thousand (Figure 17), and estimated average value added per employee is € 15.5 thousand (Figure 18). As can be expected, these average figures mask considerable variation across countries, which largely reflect the wide differences in (nominal) wage levels across European countries. At the same time, the proportion of part-time work (see Figure 11) and prevalence of day-time working (see Figure 12) vary significantly across countries as well, leading to variation in average hours worked. Table 5 provides details of the average turnover per employee and average hours worked for those countries where both data are available. Using the EU average (based on countries available), the Table also provides an index for each country of turnover relative to the EU average. In terms of an overall picture, the Scandinavian countries stand out in terms of their high apparent labour productivity. These are followed by France, Belgium, the Netherlands and the UK. By contrast, Germany, Luxembourg and Italy have lower apparent labour productivity, followed by Spain and Portugal. One additional effect that seems to be at play here is the relative size distribution of companies within the sector at a national level. Generally it appears to be the case that the greater the proportion of the total market that is held by larger companies16 (see Figure 14 and Figure 15) then the lower the turnover per employee. Looking at the pattern across countries and size categories of firms, it is generally the case that average turnover per employee (Figure 17) and average value added per employee (Figure 18) is negatively related with company size; i.e. it is the case that smaller companies (less than 50
14 15

16

Data for Belgium need to be checked with EFCI See EFCI and Uni-Europa joint declaration on day-time working, available at: http://ec.europa.eu/employment_social/dsw/public/actRetrieveText.do;jsessionid=Lf0l1lQl2tr1q4Ws8VNnJTL0vvx9JgfknyHv vyWBhPCZwR922NK1!263744025?id=11364 Defined by number of employees

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employees) typically register greater turnover and value added per employee than larger companies (250 or more employees).
Table 5 Comparison of labour productivity (turnover per worker), 2005 Average turnover per worker (€ thousand) Finland Sweden Belgium France Netherlands United Kingdom Germany Luxembourg Italy Spain Portugal Czech Republic Austria EU 39.5 49.7 21.0 21.9 14.1 14.6 13.5 16.7 16.5 15.0 10.0 12.1 7.3 18.2 21 28 21 22 15 18 20 25 25 25 20 28 30 23 Average working hours per week Relative turnover per hour worked (EU ave = 100) 237 224 126 126 119 102 85 84 83 76 63 54 31 100

Source: authors estimates based on EFCI data

There are a number of ways of interpreting the above finding. Firstly, however, it needs to be pointed out that differences across enterprise size in turnover (or value-added) per worker may reflect underlying differences in the average number of hours worked; i.e. longer working hours or less part-time employment of workers in smaller companies. Alternatively, it may be the case that average wages – which are the major component of turnover and value-added – are higher in smaller companies. Finally, it may be the case that higher turnover and value added figures reflect some degree of specialisation of the cleaning services provided by smaller firms that enables them to charge higher prices than larger, more generalised, firms. This would be consistent with differing strategies across firms with, for example, larger firms adopting business models based on earning smaller margins on high volumes of services provided, while smaller firms aim at higher margins on a smaller volume of services. Although the above mentioned factors may be relevant for explaining difference across different firm size classes, it seems likely that differences across firm size categories also tell us something about the relative ‘efficiency’ of firms, whereby larger firms are able to benefit from ‘economies of scale’, such as lower management overheads or more efficient organisation of business/service processes17. In this context, the apparently high nominal ‘productivity’ levels (as measured by turnover/value-added per worker) of smaller sized
17

At the same time, the data suggest that the difference between ‘medium-sized’ companies (50-249 employees) and ‘large’ companies (250+ employees) are typically small compared to the difference with ‘small’ companies (2-49 employees). This would suggest that any ‘additional’ economies of scale tend to be relatively small once a minimum critical size is attained.

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companies should not necessarily be construed as a positive attribute. On the contrary, since cleaning services represent an ‘input’ into other forms of economic activity (i.e. they are a cost item for client sectors), then cleaning costs may simply be higher for those clients that rely on smaller-sized cleaning contractors. In the absence of data enabling a correction to be made for any difference in the ‘volume’ of services provided per worker, the conclusion appears to be that the unit-cost of cleaning services is higher for smallersized cleaning contractors and, at an aggregate level, is relatively-speaking higher in those countries with a larger proportion of the market held by smaller companies. 2.2.3 Productivity enhancement The manual / labour-based nature of the services supplied by cleaning contractors makes it difficult to obtain (labour) productivity increases18. Although there is considerable technological development and a booming market in the sector of cleaning machinery, this technical development concerns mainly ‘quality’ aspects (including, for example, noise reduction) rather than enhancing labour productivity per se. As noted above (Section 2.2.1) there are some efforts to try to shift to more day-time cleaning which could enable greater full-time working which should raise overall productivity. Also, shifting into facilities management (i.e. widening the scope of services) is another possible means to enhance time management of workers; i.e. increase working hours through using the same personnel to undertake a wider range of different activities/tasks. 2.2.4 Demand side conditions As noted above, outsourcing - by both the public and private sector – has been an important demand driver for the industrial cleaning sector. Although office cleaning accounts for over half the market, cost saving switching to external supply of cleaning services has motivated the increase in demand from the public sector and across industry. Within industry, it appears that increasing demand for external provision of cleaning services exists across all sectors, and particularly where cost-based international or global competition is important. Unfortunately, however, there appears to be little empirical data on use of cleaning services by industry but it does seem that a high proportion of cleaning activities are outsourced; for example, Figure 19 indicates that for Sweden, Denmark, Finland and Germany over 70 percent of manufacturing firms with more than 50 employees use an external provider of cleaning services, but this proportion is much lower for Poland, Latvia, Lithuania and Slovenia. The fact that cost saving is a priority for both public and private sector clients constitutes a major challenge for the sector. In general, the pressure to reduce costs means that cost (lowest price) considerations tend to dominate over quality aspects. As a consequence, ‘best value’ (i.e. quality to price ratio) is less important in customers’ decisions than lowest absolute price. In the case of the public sector, this situation exists despite numerous initiatives to try to improve public procurement procedures (e.g. European

18

Cleaning activities can be characterised as “labour-based repetitive manual processing” (see Interim Report). The dependency on physical labour implies that possibilities for economies of scale may be limited since increasing the volume of work undertaken (e.g. physical volume of surfaces to be cleaned) is likely to result in a decline in quality and decreased effectiveness of the service provided.

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Public Procurement Directive) and the public sector is seen to be slow to change and to adopt ‘best value for money’ in procurement practices. More generally, there is a perception within the cleaning industry that many clients neither recognise nor value the services provided by cleaning service providers. In part, this is associated with a lack of visibility of cleaning services, as much of the work is undertaken at times when it is not seen by the client (e.g. early morning and/or late afternoon19). In addition, it is often the case that the purchaser of the service (e.g. procurement manager) is not the end user of the service and, as a consequence may be less concerned by the quality of the service provided than those persons whose working conditions are directly affected by the quality of cleaning services that are provided. In an attempt to improve procurement practices, EFCI, in collaboration with Uni-Europa and with support from the European Commission, has produced a guideline for clients on selecting best value when awarding contracts for cleaning services20. Nonetheless, from the perspective of the cleaning industry there still remains a lack of dialogue between clients and service providers concerning quality aspects of the service to be provided; this is particular the case during procurement and contract negotiations when cost-cutting remains the over-riding concern of clients. 2.2.5 Competition and business strategies As already noted above, wage costs, labour taxes and social security payments are the main drivers of costs in the sector, implying that where competition is price driven there is intense pressure to reduce labour costs. As profit margins in the sector are generally low, and where there are firms that attempt to undercut the market, this can result in the erosion of pay and working conditions of workers and lowering of quality standards of the services provided. For the industry as a whole, counteracting this tendency requires collective action to reduce this type of ‘unfair’ price-cutting behaviour and to maintain industry standards of services. In this respect, vigilance is also required from public authorities in relation to actions against ‘undeclared’ working practices and maintaining minimum legal wages and working practices (where these are relevant). At the same time, it can be argued that in markets where the client often holds the upper hand in contract negotiations and price setting, then clients should not be entirely be absolved of any responsibility for creating situations in which the sector becomes characterised by low wages and poor working conditions. Given the market pressure on costs/prices, two directions for business development are being pursued by companies in the sector: (i) entering niche (specialised) segments where there may be fewer competitors; and (ii) widening the scope of services provided (e.g. shift to facilities management21). Firms with their origins in the cleaning sector already occupy an important position within the facilities management sector; with EFCI estimating that of the 20 or so largest facilities management companies in each country, about half have their origins in the cleaning sector. This strong representation is

19 20 21

Night work tends to be limited to specific situations like industrial premises, hospitals and airports. EFCI and Uni-Europa (2003), “Selecting best value: a guide for organizations awarding contracts for cleaning services”. The range of possible services is wide, including, for example: cleaning, catering, security, gardening, reception, maintenance, waste management, hygiene, temporary employment.

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attributable to the strength of the core skill of cleaning service providers in terms of ‘people management’. The advantages of facilities management from supplier side relate, for example, to cost savings from more efficient deployment of staff (e.g. using same personnel to do different tasks). Also, for clients, there own internal overheads can be reduced (e.g. by removing the need to have their own internal services geared to such a large and wide range of staff profiles). 2.2.6 Internationalisation International cross-border trade in industrial cleaning services is to all intents zero; with the exception, perhaps, of some very close to border activities. Provision of cleaning services is an activity undertaken at the client’s location and so the operations of cleaning firms and their workers need to be located in geographical proximity to their clients. In terms of the internationalisation behaviour of companies within the sector, by and large most companies – including many of the larger ones – tend to be family based businesses that operate on national markets or with limited international presence. ISS is the only truly global player, and is quite different in terms of management approach – being essentially an ‘investment company’ – when compared to most other companies within the sector. According to industry representatives, there are no absolute barriers to internationalisation of cleaning service companies and those companies wanting to expand international activities will/can do so. Nonetheless, for specific aspects of activities (or specific service types) there can be different national rules that need to be complied with. From the perspective of the potential impact of international competition on the market, there does not appear to be much concern from established players on competing on the basis of quality aspects of service provision. However, there is significant concern relating even further downward pressure on prices that might result from increased international competition pressure within the sector. Fear that firms located in higher cost markets might suffer considerably from competition from low cost countries (i.e. with lower minimum wages, or standards for working conditions) under temporary movement of workers provisions was a major reason for the sector to object to the adoption of an ‘origin principle’ under proposals for the Services Directive.

2.3 Screening of regulatory and other framework conditions
The purpose of this sector is to identify and prioritise the key issues facing the industrial cleaning sector both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). The analysis is based around a screening of the sector in relation to the main regulatory and framework conditions22; the overall assessment is summarised in Table 6

22

This analysis is in accordance with the general framework for assessment of regulatory and framework conditions agreed as part of the Framework Contract of Sectoral Competitiveness Studies.

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2.3.1

Regulatory conditions and standards Labour standards and regulations In terms of national-level regulations of relevance to the industrial cleaning sector, the most important are those relating to wages and social security payment and employment conditions; for example, national minimum wages, collective wage bargaining and regulations governing conditions of employment (e.g. overtime payments, unsocial working hours, etc.) Such regulations obviously influence the attractiveness of the cleaning sector for potential workers but, as the costs are ultimately borne by clients, also the cost to clients of contracted out cleaning services. As mentioned earlier, we can see a certain degree of conflict between demand side pressure to keep down costs and supply side efforts to raise the profile, attractiveness and ultimately professionalism of the cleaning sector. Client sector standards and regulations Services supplied by the industrial cleaning sector are affected by regulations and standards relating to the (client’s) premises and/or environment to be cleaned (e.g. health, hygiene and safety, and environmental regulations) and in relation to use (and disposal) of cleaning products and equipment (e.g. hazardous products and waste disposal). This implies that relevant cleaning regulations and standards – whether provided internally or outsourced to a contract cleaning company - are ‘context’ driven, being dependent upon the activities, processes, and products and services that are ultimately to be delivered. Thus, for example, cleaning requirements will be very different for the food industry as compared to the chemicals industry, or for office cleaning compared to hospitals. Sector-level standards and regulations The industrial cleaning sector is not subject to specific industry-level regulations and compulsory standards. Moreover, there does not appear to much impetus from the sector itself for the development of formal industry standards and, if anything, the main pressure for the development of industry standards – particularly where these relate to quality aspects of the services provided - appears to be coming from the demand side (some client groups) and from national standardisation bodies (in conjunction with CEN). At the European level, CEN published a European standard on ‘Cleaning services – Basic requirements and recommendations for quality measurement systems’23 in 2001, but this appears to have generated little interest from the sector. Evaluating the general situation of standards in 2005, CEN notes that “taking into account the size of the cleaning industry, further European standards are needed. … If seen as necessary, European standards on the qualification of personnel, on code of practice or contract drafting could be further developed at the European level.”24 From the perspective of the cleaning industry itself, there seems to be little enthusiasm for the further development of national-level or European wide formal standards. One problem cited by the sector is that the industry is not providing a standardised product, since cleaning requirements are different for different client sectors and individual client
23 24

EN 13549 CEN (2005) “Final Report on European Commission Programming Mandate M/340 in the Field of Services” CEN/BT/WG 163 – N022, 15 March 2005

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companies. In addition, client demands and the services themselves are changing continuously, which makes it difficult to define and implement standards. There is concern, therefore, that imposing industry-level standards and regulations would hamper development of the sector. In contrast to the sectors position on development of formal standards, there is a much more positive attitude towards promoting greater ‘professionalisation’ of the sector (e.g. through vocational training) and improving the sectors image and recognition through improvements in the quality of service provision for clients and workers (e.g. improved techniques, products, working conditions etc.). Such efforts go hand in hand with, for example, emphasising the quality aspects of service provision (see Section 2.2.4) and promoting greater full-time working and use of day-time cleaning. Given these priorities, it would seem that there is scope for enhancing national-level (and eventually Europeanlevel) recognition of professional qualification and systems for quality accreditation of service providers, which could benefit both the sector itself (and workers therein) while providing greater information on service quality standards to be expected from contract cleaning companies. 2.3.2 ‘Other’ framework conditions Knowledge and innovation As noted earlier, the main impetus for technological innovation in the cleaning sector comes largely from the side of cleaning equipment and cleaning product suppliers. Technological development related to these inputs into cleaning processes has only a limited role in terms of improving the efficiency of cleaning operations (e.g. quantity of physical labour required for specific cleaning tasks) but can be important in terms of the effectiveness / quality of cleaning services provided. Where there is more scope for innovation within the industrial cleaning sector per se, is in relation to process and organisational innovations, particularly in relation to organisation of working practices. One example, as mentioned earlier, would be increased use of day-time working that is also linked to technological developments such as quieter and cordless cleaning equipment. Of course, such developments remain conditional upon the acceptance of clients. Labour force and skills The workforce within the cleaning industry is dominated by low-skilled workers; EFCI estimates indicate that about 90 percent of workers in the sector can be classified as ‘blue collar’ (essentially low-skilled manual workers). In addition, the sector is notable for the high proportion of female workers (around 75%) and from immigrants/ethnic minorities25. At a broader level, the impact of demographic change is seen as an important issue for the sector (see below). The sector itself seeks to promote greater professionalism through vocational training, though the focus on professional development appears to differ significantly across countries and depending on company size.

25

Details on the ethnic composition of the workforce are not easily (or in some cases legally) available, but the cleaning sector has a reputation for employing a large number of immigrant workers and from ethnic minorities.

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Market access The industrial cleaning sector is included within the scope of the Services Directive. Market access is not seen as a particularly major issue for the industrial cleaning sector; though their may be some small impact from the existence of different national standards relating to cleaning requirements (health, hygiene, safety etc.) for some client segments and types of cleaning activities. It is worth noting, also, that there was considerable resistance to the possibility of an ‘origin based’ principle to services provision that would have permitted service providers from Member States with low wage and low employment protection to undermine the position of incumbent suppliers (firms and workers) in high cost Member States. Structural change Structural change in the form of outsourcing of cleaning service activities has been a driving force for development of the industrial cleaning sector. EFCI estimates (see Section 2.1) already indicate penetration rates of around 60 percent in terms of cleaning activities outsourced to external cleaning contractors. This, nonetheless, leaves considerable scope for further expansion of the industrial cleaning sector, both in terms of turnover and employment. The industrial cleaning sector itself is also subject to structural change based on the growing importance of multi-service provision and facilities management services, which reflect both growing demand from clients for more integrated service provision and efforts by service providers to enhance efficiency through economies of scope. Competition issues The main issues related to competitive behaviour in the sector appear to concern ‘unfair’ price-cutting behaviour, where this leads to avoidance of tax, social security and working condition requirements (e.g. undeclared working). Leaving this issue aside, entry barriers into the industrial cleaning sector are limited and this is reflected in the rapid increase in the number of firms operating within the sector26. It is very difficult, however, to evaluate whether this trend may mask other elements of market malfunctioning or competition concerns. As already noted (see Section 2.1), a relatively small number of larger firms within the sector account for a substantial proportion of total turnover and employment, but this in itself provides no evidence of potential competition problems. Other forms of market segmentation may also be present, for example on a geographical basis or for particular market segments, but it is beyond this study to evaluate whether these give rise to any possible concerns. 2.3.3 Exogenous conditions and trends Technological change Rapid technological change has been identified as one of the key challenges for European industry, both manufacturing and services, particularly in relation to developments in the field of ICT. Industrial cleaning activities, which rely primarily on the provision of manual (labour-based) services and for which proximity is a necessity (i.e. activities generally need to be carried out at the clients premises), are among the activities that are
26

For example, EFCI estimates indicate that the net increase in the number of companies in the sector has been running at over 9 percent per year.

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least susceptible to the application of ICT-based technologies and to significant shifts in technological development in a more general sense. Social and demographic change As a sector that is dependent on the supply of labour-based services, demographic change (in the form of both possible decreases in the overall size and ageing of the European population) is seen to be an important challenge for the future for the cleaning sector. In particular, for a sector characterised by relatively low wages and unsocial working conditions, attracting and retaining young workers from a shrinking pool of supply is an major area of concern. From another, but linked perspective, policies to better integrate migrant workers into the labour market are seen as an important mechanism for offsetting processes of demographic change in Europe. In this respect, the industrial cleaning sector is already noted for the high presence of migrant workers and its ‘social’ role in assisting the integration of immigrants into the workforce Global competition For the reasons noted above (under technological change), industrial cleaning services have to be provided locally an so – leaving aside potential provision of services through temporary movement of workers – the sector is not really subject to global competition. Of more relevance are the possible international behaviour and location decisions of client sectors and the impact that this has on demand for cleaning services within Europe and on the internationalisation behaviour of European cleaning service companies themselves. Currently there are relatively few truly global players within the industrial cleaning sector (or more broadly, facilities management), though there are a number operation on a regional scale.

2.4

Overview of potential policy issues
The purpose of this section is to identify and prioritise potential areas for European policy initiatives both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). To begin with, the possible arguments (justification) for possible policy intervention from an from an economic standpoint are examined. After this, the analysis is based around a screening of the sector in relation to existing industrial policy initiatives and some specific themes relevant to the business services sector; the overall assessment is summarised in Table 7

2.4.1

Key arguments for policy intervention Social externalities One important social externality associated with the provision of industrial cleaning services relates to the ‘amenity value’ to other firms and businesses, consumers and the general public that may result from cleaning activities but that are not necessarily reflected in decisions over the level and quality of cleaning services (whether or not provided ‘in-house’ or contracted out). The most obvious examples would relate to exterior cleaning aspects (e.g. facades and windows) or interior areas accessed by the general public, for which both appearance of cleanliness and hygiene levels are relevant.

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Taking a broader view, as noted earlier, industrial cleaning is characterised by relatively high proportions of female and (im)migrant worker in the workforce. The ‘social role’ played by the sector in terms of integrating these persons into the workforce and, in turn, into society as a whole may provide a further justification for policy intervention. A further (negative) externality may be associated with productivity performance of the industrial cleaning services sectors and the implications that this may have for the competitiveness of client sectors. As already noted, the industrial cleaning sector is primarily a manual (physical) labour based activity for which possibilities to raise (labour) productivity either through greater use of capital (e.g. machinery and equipment) or economies of scale may be limited. Attempting to increase the volume of work undertaken (e.g. physical volume of surfaces to be cleaned) per worker is likely, therefore, to result in a decline in quality and decreased effectiveness of the service provided. The combination of limited scope for securing productivity gains for basic manual cleaning activities together with limited scope within the marketplace for service providers to differentiate their service offers on the basis of ‘quality’ lies at the heart of explaining the very strong pressure to hold down labour costs within the sector. There is, however, a limit to which labour costs can be held down in this way and, in any case, it is arguably undesirable from both a social perspective and for the long term development of the cleaning sector. Overall, it will be important for both the cleaning sector and, in turn, their clients to identifying and developing alternative mechanisms for securing (real) productivity growth27. Market power and competition Issues of market power and competition revolve around the existence and abuse of market power (e.g. entry barriers, monopolistic competition, etc.). As noted under Section 2.3.2, there is no prima facie evidence that this is a problem within the industrial cleaning sector and it is beyond the scope of this report to provide an analysis of existing market conditions. Information asymmetries Information asymmetries arise when buyers and sellers are not well informed of the services to be provided or where information is not equally distributed between them. In the context of industrial cleaning, buyer-side lack of information can relate to the actual quality of the service(s) to be provided since this cannot be ascertained in advance. For example, service contracts can specify the quantity of services to be provided (e.g. volume of cleaning, and frequency that cleaning should take place)28 but it is often difficult to specify and measure the ‘quality’ or ‘effectiveness’ of cleaning services provided29. This situation is exacerbated by the lack of industry standards, quality measures (e.g. certification) and information on customer satisfaction within the industrial cleaning sector. At the same time, cleaning contractors point to the difficulty in obtaining sufficient information from potential clients regarding the actual cleaning requirements. In particular, they point to the need for customers to allow sufficient time
27 28 29

See Section 2.2.3 i.e. activity-based cleaning systems For example, surfaces may appear to be superficially clean but may remain ‘dirty’ from a hygiene perspective.

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for site visits and consultations so that service providers can properly evaluate cleaning requirements30. Some efforts have been made towards addressing information asymmetries, such as the utilisation of ‘best practice’ guidelines for selecting cleaning services providers (see Section 2.2.4.) Also, a European standard providing basic requirements and recommend for quality measurement systems has been adopted by CEN (see Section 2.3.1). Nonetheless, it seems difficult to avoid the conclusion that more could be done to improve exchange of information between service contractors and clients. In particular, to increase the awareness of clients with regard to the importance of quality-based aspects of services, while at the same time providing them also with better (independent) information and systems to evaluate the ‘quality’ of cleaning contractors, particularly during selection procedures but, also, for services actually provided. 2.4.2 Screening against policy initiatives Table 7 provides an initial screening of the industrial cleaning sector against existing and potential EU horizontal ‘industrial’ policy initiatives31, and a number of additional possible services related initiatives. This attempts to identify those policy initiatives that, if introduced or extended, could be of most relevance for the industrial cleaning sector, in particular in terms of raising performance (e.g. productivity improvements) and/or creating opportunities for sector development.

30

31

An associated issue relates to the use of online bidding systems for cleaning contracts, where potential bidders similarly have insufficient information to evaluate cleaning needs. Based on the Mid-term Review of Industrial Policy, COM(2007) 374.

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Table 6

Industrial cleaning sector: screening of framework conditions Regulatory & ‘other’ framework conditions Heading Item Issues Relevance Sectorlevel Industryservice interactions
Impact on costs and work organisation of labour regulations (minimum wage, working conditions etc) and income tax and social security payments

National regulatory measures

National policies and measures in relation to undeclared work Health, hygiene safety and environmental regulations relating to ‘client’ sectors; Utilisation and disposal of cleaning materials Industrial cleaning is included within the Single

EU regulatory Regulatory conditions Completion of internal market legislation measures

Market Directive The sector is not covered by specific EU regulatory measures Not seen as an issue for the sector Some specific transition arrangements apply to the sector: pursuant to 2003 Accession Treaty Austria and Germany are entitled to apply transitional provisions restricting the cross-border provision of cleaning services

Industry and professional regulations and standards Knowledge: R&D, innovation and product/service development Labour force, knowledge and skills ‘Other’ framework conditions Market access (trade and investment) Structural change

Industry and professional regulations are largely national issues, and promoted through national level sector associations

Technological development of cleaning equipment and products Organisational and process innovation to enhance working practices and conditions Raising professional standards through promotion of training, accreditation etc.

-

-

Outsourcing of cleaning services Multi-services and facilities management services Undeclared work and avoidance of fiscal and

Competition policy issues Technological change Exogenous conditions Social and demographic change Global competition No or limited relevance Relevant Important Very important

working condition requirements etc. Limited entry barriers to the sector Market concentration and segmentation (?)

[see under ‘Knowledge’]

-

-

Population ageing and shrinking labour force Social inclusion and integration of migrant workers

Services provided locally Strategy of European players

28

Study on Industrial Policy and Services

Table 7

Industrial cleaning sector: screening of policy initiatives EU policy areas Heading Trade Proper functioning of the internal market
Public sector as an important driver of demand for

Relevance Sector issues -

Initiatives Trade policy

Public procurement

contract cleaning services (35-40% of sector tutnover). Improvement in public procurement systems and utilisation of best value principles

Competition policy Better regulation Better regulation and simplification Technical standards
Professional standards, codes of practice, In so far as they relate to working conditions, flexibility etc.

-

accreditation and quality standards, professional qualifications and training standards, Health, hygiene safety and environmental

Other standards

Health and safety

regulations relating to ‘own’ and ‘client’ sectors; Utilisation and disposal of cleaning materials

Research and development Intellectual property rights Innovation policy Knowledge and skills Employment, qualifications, skills / Flexicurity

Technological development of cleaning equipment and products

-

Raising professional standards through promotion of training, accreditation etc. Career development; increasing full-time working opportunities etc.

Access to finance / risk capital Energy and environment Intensive energy use Structural Change Anticipation Tertiarisation Organisational and services innovation Support for knowledge Services intensive business services Measurement and recognition of intangible assets Regional actions (demand and supply matching) No or limited relevance Relevant Important Very important Waste, water, air

[Problems associated with late payment for services, especially for smaller companies] Environmental aspects of industrial cleaning services; utilisation and disposal of cleaning materials

-

-

Organisational and process innovation to enhance working practices and conditions and promote productivity growth

-

-

-

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29

Figure 1

Industrial Cleaning: number of companies by country, 2005 (EFCI estimates)
30,000

25,000

20,000

15,000

10,000

5,000

0 Companies

IT 21000

DE 19304

ES 18041

FR 15138

UK 8300

SE 5386

DK 5154

HU 5000

NL 4000

PL 4000

AT 3500

CZ 3256

FI 3150

NO 2213

BE 1758

PT 1500

SI 645

SK 350

LU 141

Source: EFCI (2007)

Figure 2

Industrial Cleaning: turnover by country, € million 2005 (EFCI estimates)
14,000

12,000

10,000

8,000

6,000

4,000

2,000

0 Turnover

DE 10936

FR 8550

IT 6435

ES 6064

UK 5838

NL 2824

SE 2071

DK 1600

FI 1500

BE 1157

NO 890

CZ 580

HU 520

PT 400

AT 370

PL 160

SI 121

LU 100

SK 7

Source: EFCI (2007)

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Study on Industrial Policy and Services

Figure 3

Industrial Cleaning: employment by country, 2005 (EFCI estimates)
900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

DE

ES

UK

IT

FR

PL

NL

HU 71000

DK 60000

BE 55223

AT 51000

CZ 48113

SI 42090

SE 41710

PT 40000

FI 38000

NO 22791

LU 6000

SK 5858

Employment 808751 404843 400000 390000 389667 320000 200000

Source: EFCI (2007)

Figure 4

Industrial Cleaning: number of companies by country, 2005 (Eurostat estimates)
30,000

25,000

20,000

15,000

10,000

5,000

0

IT

DE

FR

ES

PL

UK

NL

SE

HU

DK

GR

FI

PT

BE

NO

AT

RO

SI 767

LT 674

IE 636

BG 313

LV 209

SK 184

EE 183

LU 112

CY 38

Companies 27009 20920 19415 17822 12766 12704 6685 6247 6103 5238 4785 3152 3133 2819 2362 2193 1541

Source: Eurostat SBS

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Figure 5

Industrial Cleaning: turnover by country, € million 2005 (Eurostat estimates)
14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

DE

IT

UK

FR

ES

NL

SE

BE

DK

GR

FI

AT

NO

PL

PT 570

HU 464

IE 423

LU 169

SI 129

RO 96

SK 62

EE 36

LT 34

LV 28

BG 18

CY 5

Turnover 12234 11655 8859 8621 6437 3969 2028 1930 1745 1511 1244 1227 1068 1005

Source: Eurostat SBS

Figure 6

Industrial Cleaning: employment by country, 2005 (Eurostat estimates)
900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

DE

UK

IT

ES

FR

NL

PL

PT

SE

AT

BE

DK

HU

FI

GR

NO

IE

RO

SI

SK 7304

LT 7014

LU 6902

EE 5581

BG 3975

LV 3818

CY 317

Employment 767232 448670413335401322279160 140573 83143 59876 47250 46451 45089 42460 31402 30885 23440 22604 18056 15438 7572

Source: Eurostat SBS

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Study on Industrial Policy and Services

Figure 7

Industrial Cleaning: share of total non-financial and non-utility business economy turnover by country, 2005 (%)
0.70

0.60

0.50

0.40

0.30

0.20

0.10

0.00
Share of NFNUBE turnover

GR 0.58

IT 0.47

DK 0.46

FI 0.42

NL 0.39

SE 0.38

ES 0.35

DE 0.33

FR 0.29

BE 0.28

AT 0.28

LU 0.28

UK 0.27

NO 0.25

HU 0.22

SI 0.22

PL 0.21

PT 0.19

IE 0.14

EE 0.12

LV 0.10

SK 0.09

LT 0.09

RO 0.07

BG 0.03

EU* 0.33

Source: Eurostat SBS

Figure 8

Industrial Cleaning: share of total non-financial and non-utility business economy employment by country, 2005 (%)
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
Share of NFNUBE emp

DE 3.8

LU 3.4

NL 3.0

ES 3.0

IT 2.8

FI 2.5

DK 2.5

UK 2.5

AT 2.0

FR 2.0

BE 1.9

IE 1.9

PT 1.8

SE 1.8

NO 1.8

EE 1.4

SI 1.4

HU 1.3

PL 1.1

GR 0.9

LT 0.8

SK 0.8

LV 0.6

RO 0.4

BG 0.2

EU* 2.4

Source: Eurostat SBS

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33

Figure 9

Industrial Cleaning: market penetration rate, 1989, 1994, and 2005
90 80 70 60 50 40 30 20 10 0 1989 1994 2004 80 80

AT

LU

PT 45 65 80

ES 37 60 79

NL 55 70 78

SK

DE 65

FI

UK 20 45

SE 13 60

BE 47 55 55

IT 50 55 55

FR 43 52 52

PL

SI

NO 45 45

CZ

HU

70

68

63

61

51

48

45

40

40

Source: EFCI (2007)

Figure 10

Industrial Cleaning: breakdown of turnover by market segments 2005

Schools and leisure, 3.4 Hospitals, 6.5 Shops and commercial sites, 2.6 Industrial (sites), 11.6

Public transport, 4.4 Windows and façade cleaning, 4.5 Associated services (waste collection, catering etc.), 3.6 Reception, gardening, maintenance services, 1.3 Services for individuals and domestic cleaning, 1.5 Other, 5.7

Industrial (agri-food), 1.5

Offices, 53.4

Source: EFCI (2007)

34

Study on Industrial Policy and Services

Figure 11

Industrial Cleaning: proportion of part-time work, 2005 (%)
90

80

70

60

50

40

30

20

10

0 Part time

DK 85

LU 85

BE 81

SK 80

DE 79

PT 75

FR 73

NL 72

IT 70

UK 68

AT 67

ES 60

SE 60

CZ 56

PL 30

FI 29

EU* 70

Source: EFCI (2007)

Figure 12

Industrial Cleaning: breakdown according to working period (%)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Night Evening Day Morning

SE 5 15 65 15

PL 10 35 50 5

DK 10 10 45 35

CZ 5 40 40 15

SI 10 45 25 20

PT 10 20 25 45

UK 10 28 23 39

ES 15 35 20 30

DE 5 50 15 30

BE 1 54 13 32

LU 0 80 10 10

SK 0 50 10 40

AU 2 70 8 20

FR 5 75 3 17

EU* 6 43 25 25

Source: EFCI (2007)

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35

Figure 13

Industrial Cleaning: breakdown of number of companies by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

DE

SK

AT

LV

LU

EE

IT

BG

CY

IE

NL

ES

RO

SI

NO

BE

FR

PT

SE

DK

FI

HU

PL

LI 8.9 2.7 2.8 2.1 1.3

GR 9.4 1.0 1.0 0.7 0.2

EU* 48.5 35.1 6.7 5.0 3.7 1.0

14.0 15.2 20.2 23.8 30.4 31.1 35.1 38.3 39.5 41.2 41.5 45.0 49.7 51.6 54.4 57.0 57.6 61.5 66.7 69.2 74.6 76.3 76.4 82.2 87.7 57.6 38.0 61.9 51.4 33.0 36.6 45.6 39.6 44.7 42.0 40.9 32.0 36.6 36.5 33.1 31.5 27.5 25.8 23.6 21.8 20.7 16.6 20.4 8.7 8.1 8.9 2.8 15.2 11.4 15.8 4.3 7.8 5.3 3.2 1.6 5.7 2.9 2.4 10.7 12.6 7.1 11.5 1.1 8.0 6.3 9.2 5.4 3.8 0.9 5.8 12.5 3.8 7.9 0.0 7.9 7.1 4.1 3.3 2.4 7.7 5.9 3.4 0.6 9.9 7.6 4.3 1.2 4.6 5.2 3.4 0.5 5.2 3.9 2.1 0.7 6.3 3.9 1.9 0.3 4.3 3.8 2.7 0.7 6.0 5.4 2.8 0.7 5.2 3.5 2.7 1.3 5.4 2.7 1.4 0.2 4.7 2.7 1.4 0.2 2.4 1.3 0.9 0.1 3.3 2.2 1.4 0.3 0.9 1.0 1.0 0.4 13.8 11.6

Source: Eurostat SBS

Figure 14

Industrial Cleaning: breakdown of turnover by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

LU 1.8 5.7 5.3 8.2 13.2 65.7

LI 4.4 5.0 3.3 10.9

DE 1.4 12.7 4.4 6.7

ES 1.5 7.1 5.6 11.2 19.3 55.3

SK 0.6 8.9 4.5 12.6 39.3

FI 9.3 9.8 4.0 4.0 6.7

PT 4.4 10.7 6.4 6.8 16.7 55.1

IE 3.8 4.7 4.9

CY 3.9 11.8

NO 4.1 12.3 7.7 9.8 19.4 46.6

BE 7.6 4.3

FR 3.0 7.4

AT 2.0 19.8 6.5 8.9 15.8 47.1

EE 4.1 8.8 9.1

NL 3.4 7.5 11.4 16.8

IT 2.7 12.1 8.7

SI 5.1 8.0 11.4

DK 15.1 13.1 8.4 8.4 15.6 39.3

SE 8.3

BG 4.9

RO 4.0 24.8 16.6 12.5 29.9 12.2

HU

PL

GR 48.9 11.1 5.2 6.1 14.1 14.6

EU* 5.1 13.4 7.5 9.3 20.7 44.0

21.6 29.0 16.1 25.7 10.4 11.6 2.1 4.3

17.1 15.7

11.3 11.9 11.4 13.3 22.8 18.5 42.5 45.9

15.5 15.5

16.2 20.0

16.8 18.7 11.7 13.7 11.4 11.0 16.5 35.4 51.6

21.0 24.4 55.3 50.4

10.3 68.6 59.1 0.0

26.4 18.6 33.8 37.0

19.2 13.7 21.2 25.3

34.3 66.1

62.4 45.4

Source: Eurostat SBS

36

Study on Industrial Policy and Services

Figure 15

Industrial Cleaning: breakdown of employment by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 250 or more

LU 0.4 2.7 2.6 6.0

SK 0.4 3.5 3.5 8.2

IE 1.8 6.8 4.0 3.5

DE 0.4 5.5 3.2 7.1

PT 3.2 5.4 3.6 5.5

EE 1.4 6.9 6.3 6.3

BE 3.6 6.2 3.6 7.7 16.6

FI 7.2 8.3 3.4 3.6 9.4

LI 7.9 4.3 3.4 8.4

ES 2.0 6.3 5.9 10.9

AT 1.0 12.5 5.0 7.5

FR 1.3 8.1 5.8 12.3

CY 3.5 13.9 11.4

GR 10.0 8.5 3.5 7.7

NL 6.7 7.5 5.8

IT 2.3 8.2

PL 14.3 1.9 4.9

DK 8.2 7.8 9.8

BG 3.0 12.1 9.4

NO 2.9 9.0

SI 5.2 7.1

LV 1.3 3.5

SE 3.7 10.8

RO 5.0 6.4

HU 14.8 8.9

EU* 2.6 8.0 5.4 9.3 23.1 51.5

11.6 12.7 10.2 12.4 13.2 14.1 12.3 15.4 14.4 12.0 12.2 11.7 22.1 11.9 16.1 12.8 17.8 18.4 14.1 21.0 33.7 24.0

10.1 11.0

50-249 empl 15.8 34.7 10.6 27.8 14.8

21.3 20.2 17.6 20.7 71.3 20.9 18.8 26.3 16.4 17.2 0.0

72.4 49.8 73.4 56.1 67.5 79.1 62.3 68.1 54.6 54.6 56.5 51.9

49.4 51.1 40.7 49.8 46.8 63.1 45.0 43.5 46.8 37.1 24.4 27.4

Source: Eurostat SBS

Figure 16

Industrial Cleaning: turnover per worker, 2005 (€ thousand)

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0 Turnover per worker

SK 0.2

PL 0.5

AU 7.3

HU 7.3

PT 10.0

CZ 12.1

DE 13.5

NL 14.1

UK 14.6

ES 15.0

IT 16.5

LU 16.7

SI 20.8

BE 21.0

FR 21.9

DK 26.7

NO 39.1

FI 39.5

SE 49.7

EU 18.2

Source: EFCI (2007)

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37

Figure 17

Industrial Cleaning: turnover per person employed by company size, 2005 (€ thousand)
80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0 2-49 empl 50-249 empl 250 or more

LI 5.7 4.7 4.9

RO 9.1 5.5 3.1

SK 14.6 9.6 5.9

PT 15.6 10.7 7.8

PL 19.8 10.1 6.1

HU 16.7 11.8 11.4

DE 24.0 14.0 14.3

ES 16.6 15.3 16.2

SI 20.4 17.3 14.5

IE 44.2 22.8 18.9

LU 41.5 20.4 22.1

AT 37.1 23.8 22.0

IT 34.0 28.3 23.4

NL 41.4 25.3 25.1

FR 38.6 27.6 27.3

GR 73.1 43.3 19.1

DK 44.4 37.3 34.5

FI 46.9 29.0 39.1

SE 44.9 33.6 40.9

BE 65.9 59.0 29.2

NO 41.0 51.6 49.0

EU* 29.6 20.0 19.0

Source: Eurostat SBS

Figure 18

Industrial Cleaning: value-added per person employed by company size, 2005 (€ thousand)
40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0 2-49 empl 50-249 empl 250 or more

RO 3.6 3.0 2.3

LI 3.3 3.4 3.1

HU 5.8 6.3 4.7

SK 8.2 6.5 4.2

PL 8.2 6.4 4.5

PT 8.8 8.0 6.3

SI 11.8 11.0 10.3

DE 18.0 11.1 11.0

ES 12.1 12.6 14.2

GR 28.4 16.8 7.4

IT 17.6 15.8 16.5

IE 25.5 18.2 14.8

LU 31.6 17.0 17.4

NL 25.5 17.4 18.3

AT 27.7 18.0 18.5

FR 25.9 20.2 20.5

BE 29.6 29.5 22.9

FI 31.3 22.5 24.6

SE 27.6 24.9 28.4

DK 30.1 27.6 26.9

NO 27.5 35.2 32.3

EU* 18.6 14.0 14.4

Source: Eurostat SBS

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Study on Industrial Policy and Services

Figure 19

Manufacturing: most important provider of industrial cleaning services by company size, 2003
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Not used Enterprise Same group External All enterprises (>49 employees) Enterprises with 50-249 employees Enterprises 250 or more employees

SE 1% 10% 1% 88%

DK 6% 20% 1% 74%

FI 8% 16% 3% 73%

DE 6% 20% 1% 72%

SI 2% 39% 7% 52%

PL 26% 29% 1% 44%

LT 55% 8% 0% 37%

LV 3% 67% 1% 29%

SE 2% 9% 1% 88%

DK 6% 21% 0% 72%

FI 10% 16% 3% 72%

DE 8% 23% 1% 67%

PL 29% 31% 1% 39%

LT 58% 8% 0% 34%

LV 4% 67% 1% 28%

SE 0% 12% 0% 88%

DK 2% 14% 4% 80%

FI 0% 19% 5% 76%

DE 2% 8% 1% 89%

PL 15% 22% 3% 61%

LT 40% 7% 1% 52%

LV 0% 65% 1% 34%

Source: Eurostat SBS

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39

3 Security Services

3.1 Introductory comments
It is important at the outset of this analysis to point out that the ‘scope’ of the private security services market in Europe varies considerably from country to country, depending largely on public policies regarding the appropriate role of the private security services sector and on the national regulatory frameworks regulating private security at national level. To a large extent, the scope of what is ‘defined’ as the private security services sector is both a reflection of, and reflected in, national legislation on private security. Due to the variation in the ‘scope’ of services and the role of private security firms across countries, it is not really possible to provide a standard definition (or coverage) of private security sector, as each country has de facto its own definition. This should be borne in mind when making comparisons across countries and when talking of the European private security services sector.

3.2 Sector overview
3.2.1 Main sector characteristics Estimates from the Confederation of European Security Services (COESS)32, based on data for 23 of the Confederation’s national member associations33 indicate that the total turnover of the guarding sector was around € 31 billion in 2005. While, with a slightly larger sample of 26 countries34, their estimates indicate that the guarding sector encompasses some 34.7 thousand companies and employs 1.36 million workers (see Figure 20 to Figure 22)35. Eurostat estimates for the sector of investigation and security services, for the 26 countries covered by the data, indicated total turnover of € 35.4 billion, 51.9 thousand companies, and 1.16 million workers in 2005 (see Figure 23 to Figure 25).

32 33

34 35

COESS (2007) “Activities Report ’06 – ‘07” Austria (AT), Belgium (BE), Bulgaria (BG), Switzerland (CH), Cyprus (CY), Czech Republic (CZ), Germany (DE), Denmark (DK), Estonia (EE), Spain (ES), Finland (FI), France (FR), Greece (GR), Hungary (HU), Ireland (IE), Italy (IT), Latvia (LV) Netherlands (NL) ,Norway (NO), Poland (PL), Romania (RO) Sweden (SE) and United Kingdom (UK). As above, plus Luxembourg (LU), Lithuania (LT), Slovenia (SI) and Slovakia (SK). Latest COESS data indicate that the sector encompasses 50,000 companies and employs 1.7 million workers (unpublished data, as of July 2008).

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41

On the basis of calculations using Eurostat data, the investigation and security services sector accounts for approximately 0.2% of total turnover and 1% of total employment in the non-financial and non-utility business economy36 of the EU (see Figure 26 and Figure 29). At an individual country level, Greece and, to a lesser extent, Hungary stand out in terms of a relatively high share of security services in turnover of the non-financial and non-utility business economy, while Bulgaria and, to a lesser extent, Romania stand out in terms of a relatively high employment shares. Comprehensive data on the growth rate of the sector is not readily available, but is probably running at around 3 to 4 percent per annum for Europe as a whole. Growth rates vary across countries, however, and currently seem to be typically higher in some Central and Eastern European countries (e.g. Bulgaria, Poland and Romania). Country specific factors, notably in relation to changes in regulations and public attitudes to private security provision, also provide important short-term drivers for growth. Although overall demand for security services is cyclical and linked to the level and growth of economic activity, it is very much influenced by specific events that affect the (subjective) feeling of security. For example, following the events of ‘9/11’, clients became much more aware of security issues in their business, which provided a positive impulse to the private security sector. At a structural level, public authorities are increasingly looking towards the private sector to have a role in the provision of service previously provided by public security authorities only, or where new demands arise (e.g. urban transport, events, public places etc.) In terms of the breakdown of activities, for the reasons mentioned in Section 3.1, it is difficult to provide a clear picture of the different segments of the private security services market. Suffice to say that the market is diverse and concerns different segments such as: guarding of public and private buildings; transport of valuable goods and money; airport and maritime security; electronic surveillance, and many others. A segment that is recently developing is ‘digital security’, i.e. security issues related to the collection, storage and transmission of digital information. As this segment requires more specific ICT knowledge, traditional private security companies look for IT partners to collaborate with in providing the necessary services to clients. The firm structure of the sector is characterised by a prevalence of small companies. Eurostat data, covering investigation and security services, indicate that nearly 65% of companies in the sector have only 1 employee, and only about 1.5% of firms have 250 or more employees (see Figure 28). These larger firms probably account, however, for around half of total turnover in the sector (Figure 29) and nearly 60% of employment (Figure 30). A limited number of these larger firms are multinational companies that are active on a global scale and offer the whole range of security services; examples are Securitas or Group 4 Securicor.

36

Defined as NACE Sections C, D, F to I and K. More normally the non-financial business economy (NACE Sections C to I and K) is utilised as a reference, but as data on the ‘utilities sector’ (NACE Section E) is missing for some countries the definition ‘non-financial and non-utility business economy’ has been used.

42

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3.3
3.3.1

Competitiveness analysis
Labour supply, costs and conditions Security services are a highly labour intensive activity and Eurostat data indicate that personnel costs represent approximately 60% of the total cost/value of production (see Figure 31); given the prevalence of micro-enterprises in the sector this figure is itself probably an underestimate of the share of labour costs in the sector37. As is the case with industrial cleaning, wage costs, labour taxes and social security payments are the main drivers of costs in the sector; which implies that costs are a priori higher in countries with higher wages and tax systems. With increasing use of private security services, there is more pressure for higher levels of quality combined with assurances that services are delivered in a professional way that ensures that there is no room for abuse of the authority by service providers and their staff. This increases the need to provide high levels of professional services, which implies the need for screened, vetted and well trained and qualified personnel and, in turn, the provision of good work conditions and a proper level of remuneration. However, in a market that is typically characterised by price-based (cost-saving driven) demand, there is an obvious tension between pressure to hold down wages on the one hand, and to provide reasonable remuneration and working conditions for employees on the other. Next to labour cost, companies that operate in markets with stringent regulation are also confronted with extra costs to be complaint with regulation (e.g. screening of personnel, training …). This cost varies significantly across Member States. For example, COESS indicates that in Germany it only costs around €9 to have a security guard ready to start working (necessary documents, screening,…), whereas in Belgium this cost amounts to more than €26 per guard.

3.3.2

Apparent labour productivity According to estimates from COESS member associations, the average turnover per person employed in the sector in Europe is around €20 thousand (see Figure 32), while Eurostat estimates for 2005 indicate a figure of €30 thousand for production and € 21 thousand for value-added per person employed (see Figure 33 and Figure 34), although there are very large differences across EU Member States. Adjusting apparent labour productivity for wage differences (see Figure 35)38 highlights relatively high productivity in three countries: Poland, the UK and Latvia. Looking across the whole group of countries, there is a broad sweep of countries with estimated ratios in the range of 100130% for which there is relatively limited divergence in apparent wage adjusted productivity. In the absence of more detailed analysis and information, there do not appear to be any obviously discernable patterns between labour productivity performance and, for example, relative market structure or stringency of regulations in the sector.

37

38

This is due to the fact that remuneration to the ‘owner’/entrepreneur is probably included under operating surplus rather than personnel costs. Apparent labour productivity is estimated by the ratio (%) of value-added per employed person to average personnel costs per employee.

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43

Looking at the pattern across countries and size categories of firms, it is generally the case that average turnover per employee (Figure 36) and average value added per employee (Figure 37) is negatively related with company size; i.e. it is the case that smaller companies (less than 50 employees) typically register greater turnover and value added per employee than larger companies (250 or more employees)39. It may be that these differences reflect underlying differences in working conditions (e.g. part-time or unsocial conditions) or some degree of specialisation of smaller security firms that enables them to charge higher prices than larger, more generalised, firms. This would be consistent with differing strategies across firms with, for example, larger firms adopting business models based on earning smaller margins on high volumes of services provided, while smaller firms aim at higher margins on a smaller volume of services. As appears also to be the case for cleaning services, it seems likely that differences across firm size categories also tell us something about the relative ‘efficiency’ of firms, whereby larger firms are able to benefit from ‘economies of scale’, such as lower management overheads or more efficient organisation of business/service processes40. In this context, the apparently high nominal ‘productivity’ levels (as measured by turnover/value-added per worker) of smaller sized companies should not necessarily be construed as a positive attribute. On the contrary, if security services are considered as a cost factor into other forms of economic activity, then these costs may be higher for client companies that rely on smaller-sized private security service providers. 3.3.3 Productivity enhancement As many of the basic services provided by private security firms are labour-based it is often difficult to obtain (labour) productivity increases. Moreover, there is something of a conflict between the need to maintain (and to improve) professional standards in the sector, which would raise costs, and pressure from clients to economise on the cost of security provision. At the same time, changes in the perception of security challenges and needs, together with considerable development in terms of new security technologies means that the scope of security services that can be provided, and their organisation, is changing. In turn, these developments provide opportunities for the development of new security services and potentially for enhancing overall productivity in the sector. On the one hand, these developments may provide opportunities for the development of specialised ‘niche’ players able to deliver high value-added services. At the same time they open up opportunities for players from other sectors to enter the security sector (e.g. ICT specialists for ‘digital security’).

39

40

Some caution is warranted, since full data on turnover and value-added per worker by company size is available only for a relatively restricted number of countries. Also, it should be pointed out that Greece has been excluded from the data shown due to the fact that is shows exceptionally high levels of on turnover and value-added per worker for the two smaller company size categories. At the same time, the data suggest that the difference between ‘medium-sized’ companies (50-249 employees) and ‘large’ companies (250+ employees) are typically small compared to the difference with ‘small’ companies (2-49 employees). This would suggest that any ‘additional’ economies of scale tend to be relatively small once a minimum critical size is attained.

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For more generalised security service providers, as is stressed in this chapter, opportunities for development and growth are strongly linked to differing national approaches and regulatory frameworks for the private security sector. Arguably, greater harmonisation of national standards would offer greater opportunities for private security firms to benefit from economies of scale. A further direction for development, which may be characterised in terms of economies of scope and greater operational efficiency (e.g. enhance time management of workers), is the shift into facilities management 3.3.4 Demand side conditions Demand for security services largely comes from two client groups: industrial companies and public sector41. As both groups differ significantly in their drivers for security services demand and relationship with security services providers, the following paragraphs will discuss each of the two types of clients separately. Industrial companies As mentioned earlier, industry demand for private security services has always been cyclical and is very much influenced by specific events that affect the (subjective) feeling of security. However, as industrial companies increasingly outsource activities, they become more vulnerable when it comes to security issues. In the past, industrial companies tended to do everything in-house, thus giving them a high degree of control over production, and sourcing and distribution, processes. With increased fragmentation of production processes and outsourcing, this is no longer the case. Therefore, there is a growing need for industrial companies to adopt good integrated security systems. Despite the growing need for integrated security systems, many industrial companies are not (sufficiently) aware of the role that private security services companies can play in this. On the one hand, private security companies are often requested to provide high level solutions and to cover a wide range of risks by clients and yet, on the other hand, clients can be reluctant to enable (potential) service providers with the opportunity to develop in-depth assessments of security risks and requirements. This restricts the possibility to develop integrated approaches to security (and results in possibly suboptimal outcomes for clients). The recent economic downturn combined with pressure on companies to cut budgets and, at the same time, the fact that no major security threats have happened lately has resulted in conditions where security budgets are often reduced as well. At this moment, under cost cutting pressures, the attitude of customers is seen increasingly to view security services as a commodity that delivers little value added. Overall, many client companies appear to view private security as a ‘commodity’ and arguably do not correctly value the services provided. This perception is strengthened by the fact that much of the work is not seen by the client (e.g. work at night, from a distance) and preventive. This means that, although the cost is clearly visible, the actual service and return on security costs is ‘invisible’ to the client.

41

The third group – private individuals – only account for a small part of the market (e.g. in Italy estimated around 5% of the market).

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To make clients more aware of different criteria when looking for a provider, instead of only focusing on price, CoESS has developed a ‘value manual’ (see www.securebestvalue.org). This instrument allows potential clients to think about their expectations concerning private security when looking for a suitable service provider. Public sector demand conditions Alongside industry, the public sector is another important demand driver. As in many countries army, police departments and other public services in charge of security services are being restructured and there is a growing demand for private security services companies to take up a more public role and to collaborate with public security services. This evolution has a strong impact on the private security business, with private security companies being increasingly asked to become involved in ‘public’ activities. At the same time, this increased role for private security is accompanied by greater emphasis by public authorities on setting (very stringent) regulatory frameworks and control systems to guard against any possible abuse of power. In setting these regulations, it is the opinion of the private security services sector that public authorities often pay little attention to the commercial interests of private security companies. As a consequence there is constant tension between the public role being played by security companies and their position as commercial entities. 3.3.5 Competition and business strategies Depending on the national regulatory framework in place, the concentration of market power differs. In countries with strong regulation (e.g. Belgium, Spain and Nordic countries), the total number of companies in the private security services business is limited and the large multinational companies dominate the market (e.g. in Belgium around 170 companies are active in the business, but the 4 largest companies alone represent 85% of the market). In countries without stringent regulation (e.g. Germany, Cyprus), the market is much more fragmented. In Germany around 4,000 private security services companies are active and the large multinationals represent a much smaller part of the market. Although in several countries there is a high concentration of market share, competition is fierce, and this has been especially the case during the last few years as security budgets are under scrutiny by many clients (see section 3.3.4). Profit margins are relatively low. Moreover, developments in the market mean that new competitors previously not active in the private security market enter the market (niches). Examples are ICT companies focusing on ‘digital security’ or property investment funds entering the private security market to evolve into ‘total facilities management’ service providers. Despite growing competition (often price based) in the industry, CoESS still sees several growth opportunities for the business, especially given changes in public authorities’ attitudes and a move from a perception of ‘toleration’ towards ‘co-operation’. In the area of services to public authorities, potential opportunities exist for the private sector to take an increasing role in “orange zone” activities42 (e.g. staffing reception desk of police
42

‘Orange zone’ refers to activities lying at the frontier between those activities that are clearly in the public domain (e.g. military, policing etc.) and those in the (private) domain of private security companies.

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station at night, reception of visitors in prisons, court security, monitoring of security cameras, speed cameras, …). In relation to services to the private sector, once the service is to be provided on ‘private territory’ then there is a very broad range of possible (actual and potential) services that can be provided. Areas mentioned for increasing scope of services include: employee theft, delivery control, etc. As for the business models that private security companies use, it is expected that the market will split up in two different segments, with small and medium-sized companies operating in niches predominately of the private kind (‘products’ are more peopleoriented) and large companies working for state and institutional clients, as well as largescale surveillance customers such as banks, airports, etc. As markets for security services will increasingly open up in the future, it is expected that international companies will take up more market share especially in this last segment. In the first segment, mainly local firms will operate. However, some nationally-based companies can be successful in expanding market share internationally and competing with larger players43. Such companies can build competitive advantages around the development of strong client relationships, strong relationships with social partners (trade unions) and having lower overheads compared to multinational service providers. In this regard, management structures and perspectives can be important (i.e. between short-term profit-based management and longer-term strategic vision for development). 3.3.6 Internationalisation There are no absolute barriers to internationalisation and those companies wanting to expand international activities can do so. Nonetheless, as national regulations vary greatly across Member States, this can operate as a strong entry barrier. Internationalisation requires considerable effort (and financial resouces) from private security companies to understand the different rules with which they need to comply in different countries, making it particularly difficult for the smaller local firms to internationalise.

3.4

Screening of regulatory and other framework conditions
The purpose of this section is to identify and prioritise the key issues facing the private security services industry, both in terms of the sector’s own development and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). The analysis is based around a screening of the sector in relation to the main regulatory and framework conditions44. The overall assessment is summarised in Table 8.

3.4.1

Regulatory conditions and standards National and EU standards and regulations The regulatory conditions relevant for the private security industry are predominantly set at the national level. As there is a strong difference across countries in defining the
43 44

The example given was the Belgian company Cobelguard This analysis is in accordance with the general framework for assessment of regulatory and framework conditions agreed as part of the Framework Contract of Sectoral Competitiveness Studies.

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industry (see section 3.1) and in terms of the vision of the industry’s role in society, this results in significant differences in the regulatory framework across countries. Some countries are characterised by very strict regulation (e.g. Belgium, Spain), while in other countries the industry hardly faces any sector-specific regulatory conditions (e.g. Germany). Because of these differences in regulation at national level, the industry has strongly argued for (an at least temporary) exclusion from the EU Services Directive45, as national legislation is so different from one country to another in terms of, for example, screening of employees, training requirements, control systems and sanctions, and many more aspects. At the same time, CoESS has stressed the need to achieve common ground for the regulation of the private security industry. In particular, CoESS has highlighted the fact that an overview of EU Member States demonstrated that “the level of effective security is positively correlated to the level of regulation”46. As noted by Born et al (2006)47, this underlines the importance of achieving a harmonisation of the regulation on private security companies at the European level and, in particular, the need for high standards at this level. A second consequence of differences in legislation across Europe, as well as the lack of a single/common definition of the industry, is the difficulty in implementing (international) standards in the industry. In countries with strong regulation the need for setting standards is less pronounced. However, in countries where regulation is much less stringent, COESS argues that there is a strong need for a standardisation system that would allow clients to distinguish providers on the basis of professional standards, performance and experience, etc. Until now such standard is not in place (though some initial activities are taking place in cooperation with CEN). It is clear that a first step, in the direction of more harmonization across Europe, is the development of a common definition of the private security industry. CoESS is making efforts to get agreement on such ‘European Definition’ of the private/commercial security services sector. However, there is still a long way to go in realising this harmonisation process. Sector-level standards and regulations Through the national associations and the European association CoESS, the industry does a lot of self regulation. At the level of industry representative bodies, restrictions apply to private security company that can become a member of one of the national federations that are member of CoESS, neither can every national federation automatically become member of CoESS48.

45

46

47

48

This exemption has been given to the industry until 2010, when the EC will assess if there is a need or not for a vertical Directive covering the sector. Joint CoESS/ESTA position paper on the Draft Directive on Services in the Internal Market’, CoESS, Brussels, September 2005 Born, H., Caparini, M., and Cole, E. (2006) “Regulating private security companies in Europe: status and prospects”, Draft Report, prepared for the European Committee on Crime Problems, Council for Police Matters, by Geneva Centre for Democratic Control of Armed Forces. For companies to be member of CoESS implies that specific minimum levels of quality are met. By setting and applying such strict standards towards members, CoESS has been recognised by the European Commission as official representative for the whole industry.

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At a European level, self-regulation has taken place in the form of the European code of conduct signed by both CoESS and UNI-Europa (representing the trade unions)49. This code of conduct covers a wide array of topics, ranging from the selection, recruitment and training of workers to the relations with the police and other private security companies. One criticism of the code is that it is weak in the sense that the provisions are very vague and, for example, do not set minimum standards on what should constitute the minimum level of training. However, this weakness can be seen to stem from the fact that regulations differ to such an extent from country to country that it is not possible to stipulate a minimum guideline. However, COESS and UNI-Europa perceive this code as a first step towards the harmonisation of the sector in the region. Another example is the European Vocational Training Manual for Basic Guarding which has been agreed upon by CoESS and UNI-Europa. Although it remains a training manual, it is an important piece of self-regulation as it introduces the standards which should be considered as a minimum basis for the training of security guards50. 3.4.2 ‘Other’ framework conditions Knowledge and innovation New developments in ICT have changed the work of private security workers significantly over the last decade. For example, new communication systems have made surveillance from a distance more efficient, satellite location or security systems using eye recognition made security systems more complex, etc. These technological innovations have made productivity gains possible within the industry. Next to the technological innovations impacting the ‘traditional’ operations in the private security industry, they also led to the development of a whole new area in security services: ‘digital security’. It refers to the protection of digital interactions taking place through means such as smart cards, mobile telephones, e-passports, etc. This new area requires very specific skills and knowledge, and has led to completely new firms entering the security industry or traditional firms forming alliances with ICT firms to acquire the necessary skills. Labour force and skills The above mentioned technological developments have a twofold impact on the labour force in the industry. Firstly, several innovations have made it possible to organise processes within the industry in a less labour-intensive and more worker-friendly way, thus improving the working conditions of workers in the industry. Secondly, the innovations also require a more technological set of skills, thus leading to the need for a more technologically trained profile of worker. Notwithstanding the above comments, it remains the case that the central core of private security activities are still reliant on provision of security workers and that the human ‘input’ is central to determining the effectiveness and value-added of security services. Accordingly, skill requirements and training are probably as important for the sector as
49

50

European code of conduct signed in private security sector, European industrial relations observatory on-line, available at: http://www.eiro.eurofound.eu.int/2003/08/feature/eu0308203f.html Source: Born, H., Caparini, M., and Cole, E. (2006), see footnote 47.

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are technological developments. However, although it is clearly important that personnel of private security firms are adequately trained, determining what constitutes adequate training, and whether such training should be provided in-house or through an external (accredited) training institution is difficult to establish. A report commissioned for the Council of Europe notes that: “in the EU Member States there is no standardisation on the level of training required in order to become a private security employee. Whilst some countries require the training to be regulated by the ministry of home affairs (such as is the case in Spain) others suggest that voluntary in-house company training is sufficient (Italy). Moreover, the minimum number of hours of training varies greatly with some countries such as Denmark or Spain imposing between 111 to 240 hours of training, whilst France for instance requires only 32 hours [51]. There are also differences in the number of training sessions employees must take as a follow up every year. Austria is an example of a state with particularly weak regulations on training for PSC employees; indeed, the duration and content is organised on the company level and there are no legal provisions for follow up training. Germany on the other hand obliges mandatory training for the operational staff of at least 40 hours, and is provided by the Chamber of Commerce”52. Market access Market access in the private security industry is strongly limited due to differences in national regulation that require, for example, specific permits or place territorial limitations on company location and activities, etc. As a consequence of these national differences, the industry is temporarily excluded from the EU Services Directive; for now this exclusion has been granted until 2010. Structural change Structural changes in the organisation of companies’ value chains (breaking up of the value chain) have made companies more vulnerable to security problems. As the production system in many companies has become much more complex, in terms of coordination (working at different locations, working with external partners, etc.), security issues have come to the forefront. This leads to an increased need for security services. It is expected that demand for integrated security systems, in particular, will rise. Competition issues Under current economic conditions, competition in the private security services is strongly focused on price. This has resulted in low margins and reduces the possibilities to undertake necessary investments in new equipment and staff (training). The largest entry barrier in the industry is created by regulation. The high administrative burden to comply with all regulations relevant to the industry hinders new firms as well as foreign firms to enter the market. Next to the regulation barrier, the technological evolution of the industry means that increasing investments in new technologies are required, which can lead to new/increased entry barriers for new firms.

51 52

Hungary requires 320 hours minimum training. Born, H., Caparini, M., and Cole, E. (2006), see footnote 47.

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3.4.3

Exogenous conditions and trends Technological change As noted in the previous section, technological change has impacted the security services industry both in terms of new possibilities for organising processes and in terms of new areas of development. A more threatening impact of technological change is the development of consumer technologies. This evolution makes ‘DIY surveillance’ possible and is seen as a potential threat to some segments of the industry. Social and demographic change Similar to all labour-based services, the expected demographic change in Europe will pose an important challenge for the private security industry to attract new workers from the shrinking labour force. Moreover, despite improvements in labour conditions, due to new developments, working conditions remain less favourable than in many other industries (e.g. in terms of working hours), which adds to the challenge of recruiting and retaining staff. Global competition Until now, competition in the private security market mainly took place at the national level. Although a few players are active in the industry on a worldwide basis, regulatory barriers have prevented the industry to really organise on a global scale. Nevertheless, it is expected that regulatory barriers will decrease over time, thus leading to a more open market and (international) competition becoming more intense, especially in the segment of state-level public authorities and institutional clients that demand more sophisticated security systems. This tendency for increased global competition is reinforced by the increased need for security systems by companies that (re)organise their value chain in an international setting. They look for a global partner that can deliver a well integrated security system across the different operations in different countries.

3.5 Overview of potential policy issues
The purpose of this section is to identify and prioritise potential areas for European policy initiatives both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). To begin with, the possible arguments (justification) for possible policy intervention from an economic standpoint are examined. After this, the analysis is based around a screening of the sector in relation to existing industrial policy initiatives and some specific themes relevant to the business services sector; the overall assessment is summarised in Table 9. 3.5.1 Key arguments for policy intervention Social externalities Maintaining an adequate level of security within any society can be considered as a basic (pre-)requisite for establishing an environment in which individuals and companies are able and motivated to engage in economic activities and, hence, for economic growth. In this sense, security is a basic public good which generates positive social externalities

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and, equally, inadequate provision is associated with negative externalities. At a public policy level a strong level of debate clearly exists over expectations regarding the level of security that should be provided and, at the same time, over the appropriate allocation between private and public responsibility and provision of security services. Moreover, such discussions cannot be removed from issues relating to the general direction of economic and social policy. In the context of globalisation where economic policy (and social policy, also) is frequently directed towards facilitating the movement of goods and services, finance and people, the economic opportunities created through such liberalisation can be associated with negative risks from corresponding easing of controls on ‘bad’ flows (e.g. terrorism, counterfeit goods, drugs, illegal immigration etc.) Thus, increasing need for security provision can be viewed as a negative externality of economic growth and global integration. Equally, increased economic and social integration can be seen to raise the level and extent to which security issues can spill over from one area to another; for example between different economic activities or between different countries and regions. Arguably, this raises the need for the greater adoption of common approaches and standards in security provision, for example in terms of greater EU-wide commonality in security policies. At the level of the private security sector, as private security companies get more involved in public activities (see section 3.3.4), their actions have a much greater impact on society at large than just guaranteeing security for private clients. This increased public involvement has been an important driver for policy intervention (through the setting of stringent regulation) in several countries. The main idea underlying this intervention is the fear of possible abuse of power and the formation of private militia next to the public security authorities. Although the private security industry itself is much in favour of strict and transparent regulation to prevent any such abuse of power, it feels that a good balance between the need to ‘control’ this public role through regulation and the commercial interests of the private security companies is necessary. As it is expected that in the future the public involvement of the private security industry will still increase, this constant tension will need proper attention. Market power and competition As mentioned in section 3.4.2, competition is mainly ‘hindered’ by regulatory barriers. There is no specific evidence of any abuse of market power and it is beyond the scope of this report to further analyse the existing market conditions. Information asymmetries Information asymmetries in the private security services industry mainly arise because of buyer-side lack of understanding of what exactly private security means and how quality of the service can be evaluated. This lack of understanding is reinforced by the fact that many activities take place in a rather ‘invisible’ way (outside normal working hours, remote) and are mainly preventive. On the other hand, as clients are often reluctant to share ‘sensitive’ information with external companies and thus give private security services companies only limited access

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to the necessary information to elaborate an efficient security plan, the latter cannot operate in the most optimal way. Therefore, the private security services industry feels that clients need to be ‘educated’ about what private security means, how it can best be incorporated in the business and what the expected value added of a private security company can be53. 3.5.2 Screening against policy initiatives Table 9 provides an initial screening of the private security services sector against existing and potential EU horizontal ‘industrial’ policy initiatives54, and a number of additional possible services related initiatives. This attempts to identify those policy initiatives that, if introduced or extended, could be of most relevance for the sector, in particular in terms of raising performance (e.g. productivity improvements) and/or creating opportunities for sector development.

53

54

To this end, CoESS has developed a ‘value manual’, making clients more aware of what to expect from a private security service provider and what criteria to focus on when looking for the right provider. Based on the Mid-term Review of Industrial Policy, COM(2007) 374.

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Table 8

Private security services: screening of framework conditions Regulatory & ‘other’ framework conditions Heading Item Issues Relevance Sectorlevel Industryservice interactions
Sector specific regulation mainly set at national level (regulation on screening of personnel,

National regulatory measures

necessary permits,…) Impact on costs and work organisation of labour regulations (minimum wage, working conditions etc) and income tax and social security payments The sector is not covered by specific EU

EU regulatory Regulatory conditions Completion of internal market legislation Industry and professional regulations and standards Knowledge: R&D, innovation and product/service development Labour force, knowledge and skills ‘Other’ framework conditions Market access (trade and investment) Structural change measures

regulatory measures Lack of single/common definition of industry at European level Common EU approaches to security policy Private security services is excluded from the Single Market Directive (exemption until 2010 for now) Need for standardization very different across countries. Until now no European wide standards. Strong emphasis on self regulation, promoted through the European association CoESS and the national level sector associations ICT developments strong impulse for innovations in security systems and equipment

Increased need for technical skills New product developments enhance working practices and conditions

Limited market access due to differences in national regulation

Organisational changes within client companies: breaking up the value chain Entry barriers to the sector mainly caused by

Competition policy issues Technological change Exogenous conditions Social and demographic change Global competition No or limited relevance Relevant Important Very important

regulation Increasing investment requirements in high-tech equipment potentially new entry barrier Technological developments in wireless communication, satellite communication Population ageing and shrinking labour force

Services provided locally Few global players versus many local players

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Table 9

Privates security services: screening of policy initiatives EU policy areas Heading Trade
Lack of common definition and differences in

Relevance Sector issues -

Initiatives Trade policy

Proper functioning of the internal market

national regulation prohibit free trade of private security services Private security services sector excluded from EU Services Directive until 2010 Public sector important demand driver.

Public procurement Competition policy

Constant tension between public role to take up and commercial nature of private security companies

Overregulation is some countries versus need for

Better regulation Better regulation and simplification

more stringent regulation in other Third party liability: unclear framework for determining liability between public/private sector and security services provider. Non availability of insurance coverage for acts of terrorism/war

Technical standards
Development of common definition of industry Professional standards, codes of practice, quality standards, professional qualifications and training standards

-

Other standards

Health and safety Research and development Intellectual property rights Innovation policy Knowledge and skills Employment, qualifications, skills / Flexicurity Access to finance / risk capital Energy and environment Structural Change Waste, water, air Intensive energy use Anticipation Tertiarisation Organisational and services innovation Support for knowledge Services intensive business services Measurement and recognition of intangible assets Regional actions (demand and supply matching) No or limited relevance Relevant Important Very important
Organisational and process innovation to enhance working practices and conditions and increase productivity Raising professional standards through promotion of training, accreditation etc. Career development; increasing full-time working opportunities etc. Technological development of security systems

-

-

-

-

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Figure 20

Security Services: turnover by country, € million (COESS estimates)
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Turnover

UK 8860

DE 4300

IT 3600

FR 3300

ES 3123

NL 1290

FI 1000

PL 1000

CH 765

SE 660

NO 625

BE 503

HU 480

IE 331

DK 250

GR 231

AT 205

CZ 198

BG 173

EE 40

RO 29

Source: COESS (2007)

Figure 21

Security Services: number of companies by country (COESS estimates)
7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

HU

FR

PL

DE

UK

CZ

IT

SK

BG

RO

GR

NL 818

ES 783

CH 407

DK 338

SE 280

IE 273

LV 270

NO 257

FI 230

AT 200

BE 177

LT 121

SI 97

EE 70

CY 48

LU 16

Companies 6000 4700 4500 3280 3000 2210 1875 1730 1112 1029 830

Source: COESS (2007)

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Figure 22

Security Services: employment by country (COESS estimates)
350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

UK

DE

PL

FR

ES

RO

HU

IT

BG

CZ

NL

GR

SK

BE

CH

SE

IE

NO

LT

AT 7000

FI 7000

SI 6157

EE 6000

DK 5250

LV 5000

LU 2500

CY 1500

Employment 300000 173000 165000 148000 87000 79900 74000 58855 54910 30030 30000 28000 20839 13000 12882 11500 10900 10000 10000

Source: COESS (2007)

Figure 23

Investigation and Security Services: turnover by country, 2005, € million (Eurostat estimates)
9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

UK

FR

DE

ES

IT

GR

NL

PL

SE 942

HU 910

BE 673

PT 640

NO 569

IE 451

FI 320

AT 291

RO 289

DK 239

BG 163

SK 126

SI 114

LU 101

EE 84

LV 67

LT 61

CY 13

Turnover 8260 5942 3736 3548 3241 2033 1489 1140

Source: Eurostat SBS

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Figure 24

Investigation and Security Services: number of companies by country, 2005 (Eurostat estimates)
16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

HU

FR

UK

DE

IT

PL

ES

PT

NL

RO

SE 953

BG 947

GR 920

BE 574

FI 408

SK 364

AT 360

DK 338

IE 335

NO 294

LV 251

SI 158

LT 123

EE 60

LU 42

CY 17

Enterprises 14619 10507 6108 3027 2806 2641 2346 1291 1250 1154

Source: Eurostat SBS

Figure 25

Investigation and Security Services: employment by country, 2005 (Eurostat estimates)
200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

UK

FR

DE

PL

ES

RO

IT

BG

HU

PT

GR

NL

SE

SK

BE

NO

IE

AT 9472

FI 7820

LT 7667

LV 7518

EE 6655

SI 5277

DK 3788

LU 2150

CY 529

Employment 186132147325140205129627107223 80252 66723 48595 35569 34961 33975 29742 18270 15646 13432 10204 9869

Source: Eurostat SBS

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Figure 26

Investigation and Security Services: share of total non-financial and non-utility business economy turnover by country, 2005 (%)
0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

0.00
Share of NFNUBE turnover

GR 0.78

HU 0.44

EE 0.29

BG 0.28

UK 0.25

PL 0.24

LV 0.23

RO 0.22

PT 0.22

FR 0.20

SI 0.20

ES 0.19

SK 0.18

SE 0.18

LU 0.17

LT 0.16

NL 0.15

IE 0.15

NO 0.13

IT 0.13

FI 0.11

DE 0.10

BE 0.10

AT 0.07

DK 0.06

EU* 0.18

Source: Eurostat SBS

Figure 27

Investigation and Security Services: share of total non-financial and non-utility business economy employment by country, 2005 (%)
3.00

2.50

2.00

1.50

1.00

0.50

0.00
Share of NFNUBE emp

BG 2.76

RO 2.06

SK 1.76

PL 1.76

EE 1.71

HU 1.44

GR 1.38

LV 1.24

PT 1.07

LU 1.05

FR 1.04

UK 1.04

IE 1.01

SI 0.94

LT 0.90

ES 0.80

NO 0.80

SE 0.70

DE 0.69

FI 0.64

NL 0.64

BE 0.56

IT 0.45

AT 0.41

DK 0.22

EU* 0.96

Source: Eurostat SBS

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Figure 28

Investigation and Security Services: breakdown of number of companies by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

EE 8.3 21.7 18.3 25.0 16.7 10.0

SK 8.5 33.0 20.6 14.0 21.2 2.7

LI 9.8 35.0 17.1 19.5 13.0 5.7

BG 19.7 29.0 14.8 17.8 14.3 4.3

RO 21.8 25.0 9.0 14.7 23.4 6.2

LV 25.9 30.7 15.9 11.6 14.3 1.6

DE 28.6 32.0 11.6 12.5 11.7 3.7

AT 31.7 49.7 8.3 5.6 3.1 1.7

PL 37.3 39.5 4.8 6.1 8.4 3.9

SI 40.5 25.3 7.6 13.3 11.4 1.9

ES 41.2 30.6 9.2 8.3 8.4 2.2

IT 42.1 26.3 10.0 10.7 9.5 1.4

NL 48.8 35.2 7.2 5.2 2.8 0.8

NO 50.7 29.6 6.8 5.8 3.4 3.7

DK 51.2 34.0 7.7 5.3 1.2 0.6

FI 61.5 27.0 4.9 3.4 2.0 1.2

LU 66.7 14.3 0.0 7.1 7.1 4.8

SE 67.7 22.4 4.7 3.3 1.5 0.5

FR 71.5 14.6 5.1 5.1 2.8 0.9

GR 85.7 8.5 1.8 1.8 1.2 1.0

PT 88.6 5.3 1.2 1.2 1.9 1.7

HU 88.7 8.4 1.4 1.0 0.5 0.1

EU* 64.5 18.7 5.4 5.4 4.6 1.4

Source: Eurostat SBS

Figure 29

Investigation and Security Services: breakdown of turnover by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

EE 0.0 1.0 1.8 5.1 18.2 73.9

ES 0.9 2.6 2.4 5.2 15.6 73.3

NO 0.8 2.8 2.0 7.0 87.3

RO 0.9 5.0 1.5 5.6 28.3 58.6

LI 0.2 2.8 4.6 7.9 17.3 67.4

DE 2.8 6.2 3.2 6.8 28.8 52.2

FI 3.3 7.5 4.0 4.9 16.0 64.3

BG 1.0 3.3 7.5 10.4 27.8 49.9

PL 2.6 10.7 2.9 7.8 19.8 56.3

FR 2.6 7.4 5.8 13.1 18.7 52.4

SK 4.2 11.1 4.4 10.5 37.3 32.5

AT 2.8 17.1 4.3 7.2 68.7

IT 2.5 5.5 8.9 15.0 39.8 28.2

LV 0.3 3.6 20.2 10.0 40.7 25.1

GR 22.3 7.2 5.0 3.9 19.1 42.5

HU 21.1 25.6 10.1 14.7 17.0 11.5

EU* 4.7 7.9 5.6 10.1 23.3 48.4

Source: Eurostat SBS

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Figure 30

Investigation and Security Services: breakdown of employment by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

GR 1.5 1.4 0.7 2.5 4.2 89.7

EE 0.1 1.1 2.1 6.6 17.0 73.1

PL 0.9 3.9 1.4 4.1 20.6 69.1

RO 0.3 1.6 1.8 6.8 37.5 51.9

NO 0.6 3.3 2.6 5.1 10.4 78.0

ES 0.9 2.6 2.8 5.7 17.6 70.5

DE 0.6 3.1 3.6 8.4 29.1 55.1

FI 2.4 5.6 3.3 4.9 11.1 72.7

LI 0.2 2.6 3.9 9.8 22.5 61.1

BG 0.4 2.6 4.1 10.7 29.3 52.9

AT 1.2 6.7 4.2 7.0 80.8

SI 1.1 2.7 3.1 13.0 39.7 40.3

NL 3.3 5.4 5.9 5.7 14.9 64.7

FR 0.7 4.8 5.1 11.4 21.0 56.9

SK 2.6 3.4 7.2 11.1 44.7 30.9

LV 0.8 5.2 7.8 11.6 48.3 26.4

IT 1.8 4.4 5.8 14.6 42.8 30.6

DK 4.5 12.5 9.7 14.9 58.5

HU 36.5 13.5 7.8 12.2 17.9 12.1

EU* 2.4 3.9 3.8 8.3 24.1 57.5

Source: Eurostat SBS

Figure 31

Investigation and Security Services: share of personnel costs in value of production, 2005 (%)
90

80

70

60

50

40

30

20

10

0
Share of personnel costs in production

HU 33

LV 41

GR 44

PL 44

BG 46

RO 48

EE 50

DK 52

UK 52

NO 53

SI 58

LT 58

IT 58

CY 62

FI 62

FR 64

SK 64

SE 65

NL 66

AT 66

IE 68

BE 72

ES 73

DE 73

PT 74

LU 78

EU* 60

Source: Eurostat SBS

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Figure 32

Security Services: turnover per person employed, € thousand, (COESS estimates)
70

60

50

40

30

20

10

0
Turnover per worker

RO 0.4

BG 3.1

PL 6.1

HU 6.5

CZ 6.6

EE 6.7

GR 8.3

CY 13.3

FR 22.3

DE 24.9

AT 29.3

UK 29.5

IE 30.4

ES 35.9

BE 38.7

NL 43.0

DK 47.6

SE 57.4

CH 59.4

IT 61.2

NO 62.5

EU 20.0

Source: COESS (2007)

Figure 33

Investigation and Security Services: turnover per person employed, 2005, € thousand, (Eurostat estimates)
70

60

50

40

30

20

10

0
Turnover per worker

BG 3

RO 4

LT 8

SK 8

PL 9

LV 9

EE 13

PT 18

SI 22

CY 25

HU 26

DE 27

AT 31

ES 33

FR 40

FI 41

UK 44

IE 46

LU 47

IT 49

BE 50

NL 50

SE 52

NO 56

GR 60

DK 63

EU* 30.6

Source: Eurostat SBS

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Figure 34

Investigation and Security Services: value added per person employed 2005, € thousand, (Eurostat estimates)
45

40

35

30

25

20

15

10

5

0
V.A. per worker

BG 2

RO 2

HU 5

LV 5

SK 6

LT 6

PL 6

EE 8

SI 13

PT 15

CY 18

GR 20

DE 20

AT 24

FR 27

ES 27

FI 29

IE 30

IT 32

SE 34

UK 34

NO 35

NL 36

BE 39

DK 40

LU 42

EU* 21.2

Source: Eurostat SBS

Figure 35

Investigation and Security Services: wage adjusted labour productivity (apparent labour productivity by average personnel costs), 2005 (€ thousand)
160

140

120

100

80

60

40

20

0
Adj. Lab. Prod

GR 67

HU 89

SE 98

BE 103

FR 104

IT 108

SI 109

DE 110

FI 112

NL 112

PT 112

LU 112

ES 113

IE 115

AT 115

DK 116

SK 117

NO 122

BG 122

EE 123

CY 123

LT 127

RO 128

LV 143

UK 147

PL 150

EU* 116

Source: Eurostat SBS

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Figure 36

Investigation and Security Services: turnover per person employed by company size, 2005 (€ thousand)
70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0 2-49 empl 50-249 empl 250 or more

BG 4.1 3.2 3.2

RO 4.3 2.7 4.1

SK 9.6 6.7 8.4

LI 7.4 6.2 8.8

PL 20.1 8.4 7.2

LV 12.2 7.5 8.5

EE 10.1 13.4 12.7

DE 28.6 26.3 25.2

HU 38.4 24.3 24.4

ES 30.7 29.4 34.4

FR 49.7 35.9 37.2

FI 48.6 59.0 36.2

IT 57.6 45.2 44.8

EU* 37.7 24.6 21.4

Source: Eurostat SBS

Figure 37

Investigation and Security Services: value-added per person employed by company size, 2005 (€ thousand)
40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0 2-49 empl 50-249 empl 250 or more

BG 1.7 1.8 1.9

RO 1.9 1.7 2.6

LV 5.8 4.1 6.8

LI 3.9 4.6 6.8

SK 5.3 5.4 6.9

PL 9.7 6.7 5.3

HU 6.2 6.0 10.7

EE 5.4 7.8 8.1

DE 17.0 21.7 20.0

FR 27.9 25.2 26.8

ES 21.0 21.5 29.5

FI 31.4 34.8 28.3

IT 28.6 33.5 34.8

EU* 19.4 17.0 15.9

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4 Private employment agencies

4.1

Sector overview
In a sector study of Bain & Co on behalf of Eurociett (hereafter called “Eurociett report”)55, the private employment agencies (PrEA) industry was estimated to employ 3.3 million agency workers (FTE) in Europe in 2006. Some 250,000 employees work as internal staff (i.e. recruitment consultants, sales persons, administrative clerks and office managers) within the agency work outlets. With an annual turnover exceeding €90 billion for 2006, the European PrEA industry accounted for 45% of the industry’s worldwide turnover. These estimates are broadly in line with Eurostat data on the industry. Eurostat estimates (based on data from 25 Member States) indicate that in 2005 some 67,000 companies were active in the industry, employing around 3.2 million workers and generating an annual turnover of €109 billion (see Figure 38 to Figure 40). On the basis of calculations using Eurostat data, the PrEA sector accounted for approximately 0.55% of total turnover, and 2.6% of total employment in the non-financial and non-utility business economy (NFNUBE)56 of the EU (see Figure 41 and Figure 42). At an individual country level, the Netherlands and the UK stand out in terms of a relatively high share of security services in turnover of the NFNUBE. While, in terms of a high share of total number of employed persons in the NFNUBE, it is again the Netherlands and Luxembourg that stand out. These employment share estimates – which are based on ‘head count’ and do not adjust for part-time working – can be compared with estimates of the Temporary Agency Workers (TAW) penetration rate from industry sources. For TAW activities, Eurociett estimates that, for the EU as a whole, the TAW penetration rate (i.e. daily FTE as % of total employment) was 1.8% in 2006, rising from 1.0% in 1996. However, this penetration rate, as well as its change over time, widely differs across countries (see Figure 43 and Figure 44). In the UK market, TAW jobs account for approximately 4.5% of total employment, whereas the penetration rate in Eastern European countries such as Poland are below 0.5%. According to Eurociett, between 1996 and 2006 the number of temporary agency workers (TAWs) in Europe has more than doubled (from 1.5 million FTEs in 1996 to 3.3 million in 200657). However, growth figures differ significantly across countries. Whereas in more mature markets such as the Netherlands, the UK, Belgium and France the annual
55

56

57

Eurociett (2008), “More work opportunities for more people: unlocking the private employment agency industry’s contribution to a better functioning labour market”, 72 p. Defined as NACE Sections C, D, F to I and K. More normally the non-financial business economy (NACE Sections C to I and K) is utilised as a reference, but as data on the ‘utilities sector’ (NACE Section E) is missing for some countries the definition ‘non-financial and non-utility business economy’ has been used. Based on data from 19 Member States.

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growth rate over the period 1996-2006 (CAGR) ranged from 3.5% to 7.6%, in many other Member States the market has been booming between 1996-2006 and showed double digit annual growth figures (ranging from 12.9% in Germany to even 41.4% in Italy58) (see Figure 45). In terms of the breakdown of activities, the core business of private employment agencies (PrEAs) is clearly the temporary agency work (TAW) activity. Depending on market conditions (i.e. markets with no restrictions on additional activity provision versus markets with strong regulatory restrictions, see later) the share of TAW activities in PrEAs’ total portfolio varies from 86% in UK to 100% in Spain (see Figure 46) a country in which temporary work agencies can only provide temporary work services. The remaining activities consist of additional HR-related services, such as support in permanent recruitment and placement, outplacement, HR-related administration. The industry structure differs considerably across Member States and seems to be interlinked with both the regulatory framework in place, and the demand structure in the market. In countries where (strong) regulatory restrictions exist in the use of TAW and the offering of PrEA activities (e.g. France, Belgium), the market is highly concentrated and dominated by large global players such as Adecco, Manpower or Randstad; for example, in France the top 5 companies accounted for 83% of the industry’s revenues in 2005. Moreover, in France and Belgium it is mainly larger client companies make use of PrEA services, and those companies most often look for an international partner.. In the UK where there are no significant restrictions on PrEA activities and TAW use, and PrEA services are more extensively used by SMEs, the PrEA market is much more fragmented and smaller niche players play a significant role in the market, next to the large multinationals. The market share of the top 5 in the UK PrEA industry only amounted to 20% in 2005 (see Figure 47). Eurostat data from 13 member states indicate that more than 60% of the private employment agencies have only 1 employee and nearly 20% have between 2 and 9 employees. Large companies (more than 250 employees represent less than 2% of the total number of firms (see Figure 48). Yet, the Eurostat data indicate that this last group of firms accounts for more than 65% of total turnover in the industry (see Figure 49) and 71% of employment (see Figure 50). In general, it is expected that in the coming years will see further consolidation among larger players in the market. A recent example is the merger in mid-2008 of the Netherlands-based companies of Randstad and Vedior to create the second largest PrEA company in the world (after market leader Adecco). At the same time as consolidating its position in European markets, Randstad’s purchase of Vedior is seen as a way to strengthen its position in specialist staffing (e.g. nurses, accountants), which has been the fastest growing segment of the staffing market, and to facilitate international expansion in emerging markets.

58

In Italy, the double digit growth figure can be explained by the legal recognition of the industry in 1998, paving the way for the development of agency work.

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4.2
4.2.1

Competitiveness analysis
Labour supply, costs and conditions PrEA services are typically labour intensive since the major part of their activities relate to the supply of temporary workers and accordingly a major part of their turnover reflects the (labour) costs of workers supplied to clients. On average, the share of personnel costs in total production costs/value amounts to over 60% (Figure 50). Nevertheless, Eurostat data indicate that this share of personnel costs varies significantly across EU Member States (see Figure 52) with personnel costs in Poland only representing 23% of total turnover while personnel costs in Luxembourg represent 95% of total turnover. A number of factors appear to be at play here, including the level of the share of gross operating surplus (‘profit’) in turnover59. Drawing a broad picture we can distinguish the following groups of countries: • Countries where shares of personnel cost exceed 80% of total turnover (e.g. Luxembourg, France, Spain, Belgium, Italy and Portugal). These are markets characterised by relatively stringent regulations on the scope of activities of PrEA companies and use of TAW. In these markets, PrEA services are largely restricted to provision of TAW and so sector turnover essentially reflects the personnel costs of supplied workers. • Countries where shares of personnel costs are in the range of 70-80% of turnover (e.g. Scandinavian countries and Germany60). • Countries where shares of personnel costs are below 60% of turnover. This includes virtually all the new Member States for which data are available, together with those older Member States recognised as having less stringent regulations on PrEA activities (e.g. UK, Netherlands, and Ireland). Though it is clear that there is significant variation across these countries that may in part reflect the structure of the sector in individual countries, by and large it seems reasonable to assume that the relatively low proportion of personnel costs in total turnover reflects the fact that in these markets there is much greater scope for PrEA companies to provide additional (i.e. HR-related) services. In this respect, the scope for creation of additional ‘valueadded’ services (i.e. beyond the costs of supplied labour)61 is greater in these countries. An inherent characteristic of the PrEA industry is the high turnover of employees. As most temporary agency workers use PrEAs as a stepping stone to enter or come back to the labour market, the industry is by definition faced with a rapidly changing labour force. The PrEA industry plays an active role in facilitating transformations in the labour market. It clearly has a ‘social role’ by facilitating access to the labour market for “outsiders” (i.e. long-term unemployed, older workers, ethnic minorities and disabled people), thus reinforcing social cohesion and diversity in the labour market. Most of these outsider groups are over represented among the TAWs.
59

60 61

To some extent the low share of personnel costs in countries with a high proportion of micro enterprises (see Figure 48) and relatively high proportion of operating surplus (e.g. Poland) may reflect the fact that remuneration to the ‘owner’/entrepreneur is included under operating surplus rather than personnel costs. Also, Estonia. From an accounting perspective, the cost to clients of temporary workers supplied by the PrEA sector is counted within the value-added of the PrEA sector.

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PrEAs are also recognised by the European Commission in its communication on flexicurity as key in implementing efficient active labour market policies (ALMP). It seems that there is a negative relationship between the TAW penetration rate and longterm employment (i.e. the higher the TAW rate, the lower the long term unemployment rate). In many countries PrEAs now partner with public employment services to help reducing unemployment. Despite the recognition of their positive role in the labour market, the Eurociett report states some important (mis)perceptions that exist about the labour conditions at PrEAs, such as, for example, the perception of the existence of worse working conditions for TAW. Eurociett highlights that these (mis)perceptions lead to an under-leveraging of the full benefits and potential that the PrEA industry can play in the labour market. Finally, the demographic changes that Europe is facing (in the form of both possible decreases in the overall size and ageing of the European population) and the resulting tightening of the labour market are seen as both a challenge and an opportunity for the PrEA industry. As the “war for talent” will worsen, demand for PrEA services is expected to grow as companies will have a harder time finding the right skills in the market. But, like the other industries, PrEAs will also be faced with the tighter labour market, possibly limiting industry growth. 4.2.2 Apparent labour productivity Before discussing apparent labour production in the PrEA sector, it should be pointed out that from a statistical perspective the data on agency workers does not distinguish between those workers employed in the sector (i.e. direct employees of PrEA companies, themselves)62 and workers engaged as temporary agency workers (i.e. hired out to client companies). This implies that the data reported in this sub-section (and subsequent subsections) primarily reflect the apparent labour productivity of temporary agency workers rather than that of workers ‘within’ the PrEA sector. Accordingly, some caution is necessary in the interpretation of labour productivity data and, in particular, it is important to remember that, to a large extent, variables such as turnover, value-added and personnel costs will reflect the financial remuneration and other labour costs associated with the provision of temporary agency workers. For example, to the extent that the composition of skill-levels (and corresponding wage levels) of temporary agency workers varies across countries then this will be reflected in relative levels of personnel costs of the PrEA sector. The average turnover per person employed in the PrEA industry in the EU-27 was around €34 thousand in 2005 (see Figure 53) and the value-added per person employed amounted to €26 thousand (see Figure 54). Large differences exist between the EU Member States, with average turnover per person employed ranging from only €5 thousand in Bulgaria to €50 thousand in the United Kingdom63, and value-added per person employed ranging
62 63

EuroCiett estimates that there are some 250,000 employees working as internal staff within the agency work outlets. The data indicate a turnover figure of €95 thousand for Ireland, but this figure appears to include a substantial component related to the (re-)sale of goods and services purchased for resale in the same condition as received (see Figure 52).

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from €3 thousand in Bulgaria to €41 thousand in Ireland. It is clear that the wide differences in wage levels across the EU-27 have a large impact on these differences. However, even when adjusting apparent labour productivity for wage differences, a significant variation across countries remains (see Figure 55)64. Again (see Section 2.2.1) we can see that by and large apparent labour productivity is higher in those countries with relatively mature and un-restricted markets (e.g. UK, Ireland, Netherlands) and some of the new Member States. By contrast, apparent labour productivity is relatively low in countries with more restricted markets (e.g. Luxembourg, Italy, France, Portugal, Spain and Belgium) In explaining differences in level of turnover per employee, in addition to differences in wage levels, a second reason for differences across countries can be significant variation in the proportion of part-time work. A limited dataset on part-time work in the PrEA industry (containing data from 5 member states – Denmark, Romania, Spain, Sweden and Slovenia) already shows that the share of part-time workers in total employment varies from only 1.1% in Slovenia to almost 60% in Denmark (see Figure 56), leading to a large variation in average hours worked per employee. A third reason for the observed differences in apparent labour productivity seems to be the structure of the PrEA industry at national level. Eurostat data from 11 Member States indicate that in general the turnover per person employed (see Figure 57) and the valueadded per person employed (see Figure 58) tend to be higher in smaller companies (less than 50 employees) than in larger companies (more than 50 employees). This implies that in markets that are dominated by larger firms the average turnover and value-added per person employed is lower than in markets where many SMEs are active in the PrEA industry. A possible clarification for the higher turnover and value-added per person employed in smaller companies can be a difference in business model (see also 2.2.5), where small companies tend to focus on niches following a small volume/high margin strategy and larger companies tend to follow business models based on high volume business and lower margins. Next to this, differences in the average number of hours worked might exist between smaller and larger firms due, for example, to less use of part-time employees. 4.2.3 Productivity enhancement Following from the introductory comments made in the previous subsection, and from a somewhat artificial statistical perspective, the apparent labour productivity of PrEA activities will reflect the underlying composition of supplied temporary agency workers. Thus, for example, raising the proportion of high-skilled workers supplied under TAW contracts or increasing the average number of hours worked by temporary workers (e.g.

64

Apparent labour productivity is estimated by the ratio (%) of value-added per employee to average personnel costs per employee. Under normal circumstances this ratio should exceed 100%, since average value added (which includes personnel costs) should be greater than average personnel costs. The greater the ratio (in excess of 100) then proportionally the greater the value added per employee created in addition to the cost of their labour.

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through the use of less part-time workers)65 would have the effect of raising apparent labour productivity. This is not to say that such changes would not, in fact, also raise the productivity of internal staff of PrEA companies, but that any increase in apparent productivity would largely reflect the increased average personnel costs of temporary agency workers. Focussing on the productivity aspects of internal PrEA activities (as opposed to that of temporary agency workers), it remains the case that many PrEAs are relatively labour intensive66 and require personal contact between internal agency staff and both TAWs and clients. This tends to imply that increases in (labour) productivity are not so much to be obtained from technological progress, although developments in ICT applications can be seen to be important for searching for new TAWs and for the development of systems for managing data and organising workflows etc. More generally, organisational innovation is an area where opportunities for enhancing productivity are thought to be possible. One important possibility for raising productivity within the PrEA sector is through broadening of the portfolio of activities towards more HR related services other than TAW. Available data (see Section 2.2.1 and 4.2.2) suggests that productivity (and profitability) is higher in countries where there are less restrictions on PrEA activities than in countries where regulatory restrictions limit or even prohibit such widening of the scope beyond TAW services (e.g. France, Spain). In general, provided that turnover/value-added is higher for such activities than for standard TAW given the same amount of hours worked, shifting towards such HR related services can increase productivity. 4.2.4 Demand side conditions Staff flexibility becomes increasingly important for companies to absorb increased fluctuations in economic activity and thus to remain competitive. Surveys in different European countries have shown that the use of PrEA services helps managing such fluctuations (see Figure 59 and Figure 60). It has been recognised in several countries that the use of TAW directly contributes to enhancing the competitiveness of user companies. The demand structure for TAW services varies significantly across countries. In countries such as Belgium, France and Germany the main sector using TAW is industry. The share of industry in total TAW in these countries ranges from 60% to 75%. Services sectors take up the remaining share, since regulatory restrictions mean that use of TAW in the public sector is (almost) nonexistent. In countries such as the UK, Spain and the Netherlands on the other hand, more than half of demand for TAW comes from clients in the services and public sectors. In these countries industry’s share only amounts to less than 40%. In the countries with no significant regulatory restrictions on the use of TAW

65

66

Although, given the fact that TAW is often seen as a good solution to match lifestyle choices or personal constraints (ànd is also promoted that way by the PrEA industry itself, see Eurociett report (2007)), productivity gains via this option might be more difficult to realise. It would, nonetheless, be useful to have better data to substantiate, for example, the importance of investments in ICT (and use of other goods and services) for the PrEA sector.

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in public services (e.g. UK, the Netherlands), the public sector accounts for a share of 20% and more of total demand (see Figure 61). Due to the existing restrictions on the use of TAW in the public sector in different Member States (Belgium, Greece, France, Luxembourg, Spain), contrary to several other services industries (e.g. cleaning, private security) the public sector is not a very important driver of demand in the PrEA industry. However, the UK example shows that TAW can play an important role in providing flexible solutions in public sector areas such as the education sector. It is the case that, in general, PrEA services are more widely used by large companies and the penetration of PrEA services among smaller companies is still very limited in most countries. The only exception is the UK market, where many smaller service companies make similar use to larger firms of PrEA services (see Figure 62). Possible reasons for the lack of penetration among smaller companies include lack of awareness about the possible role that TAW can play in SMEs, and possibly existing misconceptions concerning TAW. Clients mainly make use of TAW for short term assignments (< 6 months). Longer term assignments are limited and range from less than 5% of the total amount of assignments (in Spain, France) to 30% in the Netherlands and Germany. Recently, there is a tendency in large client companies to shift responsibility for ‘PrEA services purchase’ to purchase managers and no longer to retain this function within HR departments. Consequently, PrEA services tend to be treated as a cost element, rather than as a more strategic option, which is seen as an unfavourable development for the PrEA sector. It can also be noted that there can be a conflict in the interests of clients and the sector in terms of the development of sector-related regulations and conditions. The PrEA industry is generally in favour of improved conditions for agency workers (e.g. equal treatment conditions) as this can encourage workers to see TAW as a more relatively favourable option to securing employment. This can conflict, however, with clients’ objectives of reducing costs and/or utilising working conditions that differ from those of permanent staff. 4.2.5 Competition and business strategies The PrEA sector is a young industry in Europe and still in a phase of full expansion. Markets opened up only very recently in some EU members states (Spain in 1994, Italy in 1998, Greece in 2000, and new Central & Eastern Europe Member States in 2000-2004). Between 1996 and 2006 the sector has grown at an average annual growth rate of 6.8%. It is forecasted that this growth rate will remain at around this level for the next five years (under the assumption of no significant changes in regulation). The regions with most growth potential within Europe are the Eastern European countries and Germany.

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In general, the expanding market means that conditions are reasonably favourable for PrEA companies and clients remain prepared to pay significant mark-ups for temporary workers67. Nonetheless, competition in the PrEA market has risen over the years and has been compounded by changes in the behaviour of larger client companies that make use of PrEA services where responsibility for negotiating TAW contracts has shifted from the HR department towards the purchasing manager. This has tended to result in increased focus on cost cutting, lowering the negotiating position of PrEAs. In general two broad groups of companies can be identified within the PrEA sector: (i) a limited number of large multinational companies that are active on a global scale and mainly originate from Europe or the US (e.g. Adecco, Kelly Services, Manpower, Randstad, etc.); (ii) a range of small firms that are locally active and often are specialised in a specific niche segments. Within the sector, business models differ. The larger players tend to follow business models based on high volume business whereas smaller specialised niche players work on small volume high-margin models. Unlike many other related services industries, there appears to be less of a shift in the PrEA sector towards a broader range of facilities management activities other than HR services. The main focus when broadening service activities lies in increasing the scope within the HR services that are delivered to customers. It is expected that, in those countries where PrEA companies are not restricted in the provision of such services, PrEAs will take over more HR activities from companies in the future (training, HR administration, etc.). Despite an increasingly tightening labour market in many European countries, until now the bargaining power of PrEA companies vis-à-vis their client companies has not increased markedly. However, it can be expected that this might come over time as the ‘war for talent’ will become more explicit. Already pressures from the labour supply side can be seen for specific types of skilled workers (e.g. nurses). 4.2.6 Internationalisation Cross-border activities within the industry are very limited. Eurostat data for 5 EU Member States (see Figure 63) show that the external service provider of personnel related services to client companies is almost always located within the same country and even within the same region as the client. The reasons for this very limited internationalisation are twofold: • Regulation in different countries restricts the possibilities of cross-border activities (e.g. in Portugal, you need a local branch to do business); • With the exception of really high skilled profiles, workers mobility is still very limited. Language barriers reinforce this limited workers mobility. At the same time, especially the large multinational PrEA companies are very active at the international level, with the development of their international network reflecting the international development of client companies and general economic development
67

One figure quoted in discussions was that PrEA companies are able to operate with a margin of 15-20% on temporary workers.

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patterns (e.g. opportunities/expansion in Eastern Europe, the BRIC and VISTA countries). However, due to the above mentioned restrictions to internationalisation, the structure of these companies is more a multi-national structure rather than a global structure (i.e. companies being “glocal” rather than “global”).

4.3

Screening of regulatory and other framework conditions
The purpose of this section is to identify and prioritise the key issues facing the PrEA industry both in terms of the sector’s own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). The analysis is based around a screening of the sector in relation to the main regulatory and framework conditions68; the overall assessment is summarised in Table 10.

4.3.1

Regulatory conditions and standards Labour standards and regulations / Sector-level standards and regulations The PrEA industry is a heavily regulated sector in many countries. Poor working conditions for TAW in some cases in the past have inspired both policy and the sector itself to issue regulation and sector-specific standards. At national level, regulation on TAW is mostly inspired by the principle of balancing protection of workers and flexibility of the labour market. This national regulation is frequently complemented by sector-level collective labour agreements aimed at protecting working conditions. In general terms, an important part of regulation influencing the PrEA industry are those relating to wages and social security payment and employment conditions; for example, national minimum wages, collective wage bargaining and regulations governing conditions of employment (e.g. overtime payments, unsocial working hours, etc.). Although in several EU countries TAWs enjoy the same rights as permanent workers, in other countries there is still a difference in the rights and duties attached to TAW work versus other forms of employment. At European level, the Temporary Agency Work Directive aims to create parity between the working conditions and benefits of temporary workers and permanently-employed staff. It is a continuation of the policy of creating parity for all "atypical" workers (as has been implemented for part-time workers). Agreement on the Directive was reached on 10 June 2008 at Council level. The Directive will now be subject to a second reading within the European Parliament. Alongside this Directive is the Posting of Workers Directive (96/71), which aims to guarantee that the main working conditions (e.g. minimum wage, minimum work periods, minimum rest periods, and minimum paid annual holidays) of migrant agency workers meet the same requirements as workers in the country of destination. For the PrEA industry itself regulation of the market is both seen as a necessity and a barrier limiting the full development of the sector. Eurociett recognises that in the past in some cases poor working conditions used to be much more common for TAWs. And
68

This analysis is in accordance with the general framework for assessment of regulatory and framework conditions agreed as part of the Framework Contract of Sectoral Competitiveness Studies.

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although the PrEA industry has been reformed and professionalized, misconceptions about the nature of PrEAs still exist (such as ‘TAWs endure worse working conditions than permanent workers’, ‘TAW places workers in precarious situations’). Therefore, the industry invests a lot of effort to avoid any ‘abuse’ of TAW. Above the existing regulation, Eurociett has established a voluntary European Code of Conduct for its European Members, which provides agreed general principles on PrEA practices. Despite the recognised need for good regulation and standards by the sector, at the same time it urges regulatory authorities to remove those restrictions on TAW activities that are seen as ‘unjustified’. Especially the existing restrictions on TAW use (sectoral bans, restrictions on ‘reasons of use’) and restrictions on PrEAs portfolio of activities that still exist in several countries, are considered unjustified and limiting the sector’s growth69. Client sector standards and regulations Services supplied by PrEAs to client companies are affected by regulations and standards relating to the client’s sector in so far that these standards and/or regulation can have an influence on the type of qualification or skills that are required by the client for the TAW job. The service rendered by the PrEA to the client and the necessary processes (search activity, qualification checks, administrative follow-up, etc.) as such are not significantly different from one client to another (although some types of vacancies may for example need more intensive search, possibly through different search channels), however it is clear that the content of the TAW job is dependent upon the activities of the client company. Next to the (limited) influence of client sector standards and regulation, in several countries the use of TAW itself is (severely) restricted or even prohibited in specific sectors (sectoral bans). The most significant restrictions are to be found in public services and construction; for example, in Spain, TAW is strictly banned from public services and construction, while in Belgium and France its use is restricted to very specific situations. 4.3.2 ‘Other’ framework conditions Knowledge and innovation The influence of technological progress in the PrEA industry largely comes from developments in ICT; for example new communication systems enable the PrEA industry to develop more efficient ways to link supply and demand. Such technological innovation often drives/enables process and organisational innovations in the industry70. Labour force and skills The level of skills required in TAW broadly differs across countries. Based on Eurociett data from 6 Member States, we see that in most countries high skills are only to a limited extent required (for 2% to 9% of total TAW jobs) (see Figure 64). The share of medium
69

70

Eurociett forecasts that only the lifting of the existing sectoral bans and reasons of use in 6 EU member states (i.e. Belgium, France, Germany, the Netherlands, Spain and UK) would create an additional 570,000 TAW jobs by 2012. An example is the digitalisation of the service voucher system in Belgium, a system that allows individuals to purchase a government-subsidised domestic cleaning service (house cleaning, ironing, washing). At the introduction in 2004 the system exclusively made use of paper vouchers that individuals used to pay the TAW. Now, payments can be arranged through electronic vouchers, making the administrative handling by the PrEA less time-consuming.

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skilled jobs and low skilled jobs however, differs significantly across countries. The share for medium skilled jobs ranges from 30% in Spain to around 80% in the UK, whereas low skills (i.e. no specific qualifications required) are only required for something more than 15% in the UK versus for about 65% of the TAW jobs in Spain. The level of skills required per country is strongly influenced by the demand structure (manufacturing companies versus services companies or public services companies) and the existing restrictions at national level on the use of TAW (restrictions on TAW use, sectoral restrictions, restrictions on PrEAs activities). It can be expected that as a consequence of the demographic change that Europe is facing and the related ‘war for talent’, skill requirements for TAW jobs might increase. Due to the tightening labour market, client companies will encounter more and more problems finding specific skills in the market, increasing the search costs for finding new employees. PrEAs can play an important role in helping companies to solve temporary capacity problems and even to identify suitable candidates with the necessary skills for hiring. This may lead to a significant change in the role that PrEAs play in the labour market in the future. Market access Market access is a major issue in the PrEA industry. In several EU Member States the sector is confronted with different restrictions, such as sectoral bans or restrictions regarding the use of TAW services. At the moment the services provided by temporary work agencies are is excluded from the EU Services Directive. The sector itself had hoped to be included in the EU Services Directive, as this could have served to lift some of the ‘unjustified’ restrictions that now exist at the national level (e.g. by strengthening rights related to freedom of establishment). Currently, national regulations and licensing requirements are significant barriers to entry (e.g. the example of local branch requirements for Portugal), especially for SMEs. It is expected that in the coming years more harmonisation in the EU will come for labour conditions in general, but not for TAW specifically. Nevertheless, the lifting of existing restrictions could have a large positive effect on the job creation through TAW71. Structural change Global competition has led to an increased need for more flexibility within firms, to be able to absorb increased fluctuations in economic activity. The PrEA industry plays a central role in providing companies with the necessary staff flexibility; for example, to help managing economic fluctuations72. Next to the structural changes influencing business organisation, the demographic changes within the EU-27 will also have a strong impact on the PrEA industry. As firms

71

72

The Eurociett report has made estimates of an additional extra 570.000 jobs created in 6 European countries (above the expected + 1.6 million extra jobs over the period 2006-2012 due to organic growth) if only the existing restrictions on sectoral use and reasons of use would be lifted. For example, a survey conducted in Belgium finds that TAW is seen as the most relevant solution (see Figure 59).

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will encounter difficulties in finding the right people due to a shrinking labour supply, it is expected that demand for higher skilled TAW will increase and that the role of PrEAs will shift from pure TAW services to more additional HR services (recruitment services, etc.), conditional to a lifting of regulatory barriers related to restrictions on PrEAs activities. Competition issues The most important competition issue in the PrEA industry is the perceived ‘unfair’ competition from other types of flexible employment forms (e.g. part-time work, fixedterm contracts). At national level, TAW regulation still faces a series of discriminatory restrictions that do not allow it to compete on an equal footing with these other forms. One example of such discriminatory restriction is the different treatment of TAW contracts and fixed-term contracts with regards to end of contract compensation in Spain and France. Within the PrEA industry itself, we found no direct evidence of competition problems. We do remark that in several Member States the PrEA industry is highly concentrated. However, this in itself is no evidence of potential competition problems and it is beyond the scope of this study to further evaluate this in more detail. 4.3.3 Exogenous conditions and trends Technological change Rapid technological change has been identified as one of the key challenges for European industry, both manufacturing and services, particularly in relation to developments in the field of ICT. As mentioned earlier, ICT developments can be considered as an important driver/enabler of process and organisational innovations within the PrEA industry. ICT has opened up new possibilities for PrEAs to organise themselves in a more efficient manner and to develop new and improved services for their clients. Social and demographic change As pointed out in section 2.2.1, demographic change in Europe has an ambiguous effect on the PrEA industry. On the one hand, demand from client companies is expected to increase, as they face more difficulties in finding appropriately-skilled labour. On the other hand, it will also become more challenging for the PrEA industry to find a sufficient supply of labour in the shrinking labour market. An important mechanism for off-setting this process of demographic change in Europe is the integration of migrant workers into the labour market. The PrEA industry already plays an important role in integrating migrant workers into the labour market. Whereas the focus is now mainly still on the integration of lower-skilled workers, in the future this is also likely to involve more and more highly-skilled workers. As such, the international mobility of workers will become an important issue for the PrEA industry, as it seeks to be able to address fully the needs of clients. Hitherto, however, such international mobility has been limited, owing to both cultural factors and existing regulatory barriers. Several countries have now started to implement an active policy to attract foreign - especially highly-skilled – workers (‘brain gain’).

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Finally, it is not only firms that demand increased flexibility, but also workers, who increasingly tend to look for increased flexibility in managing their work-life balance. Work and other activities tend to be organised in a different way than before, with workers wanting to combine work with other activities such as further education (life long learning) or personal pursuits. The PrEA industry can provide this flexibility to workers. Global competition Within the PrEA industry a limited number of global players are active (e.g. Manpower, Randstad, Adecco). These players are active on a global scale and, in several EU Member States, they ‘control’ a majority, or at least large shares, of the market. Nevertheless, even these global players do not really have a truly global strategy or structure, but more a multi-national structure. Regulatory barriers at national level, as well as language barriers, local needs of customers, and limited worker mobility, mean that the establishment of an extensive network of local branches in each country/region where the firms do business.

4.4

Overview of potential policy issues
The purpose of this section is to identify and prioritise potential areas for European policy initiatives both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). To begin with, the possible arguments (justification) for possible policy intervention from an economic standpoint are examined. After this, the analysis is based around a screening of the sector in relation to existing industrial policy initiatives and some specific themes relevant to the business services sector; the overall assessment is summarised in Table 10.

4.4.1

Key arguments for policy intervention Social externalities At the European level, the flexicurity model has been promoted as a way to achieve the common employment objectives of Lisbon: creating more and better jobs, strengthening social cohesion and facilitating active inclusion of all in the labour market. As the PrEA industry plays a central role in facilitating transitions and transformations in the labour market (see also section 5.2.1), it is clear that PrEAs make a positive contribution to this flexicurity model73 and a better functioning labour market at large. As such, the social externalities of the industry are considerable. The following elements highlight the position of the PrEA industry in society at large, that may provide a further justification for policy intervention: • A well functioning PrEA industry contributes to a lowering of unemployment. A negative correlation exists between the long-term unemployment rate and TAW penetration rate. Therefore, in several countries TAW has been recognised as an integral part of an active solution in curbing unemployment.

73

PrEAs have been explicitly recognised as key players in the report by the Lisbon employment taskforce.

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Section 5.2.1 already underlined the ‘social role’ that the PrEA industry plays in terms of integrating ‘outsider’ groups into the labour market. As such the industry reinforces social cohesion and increases participation and diversity in the labour market In general, TAW enhances worker employability by providing opportunities to gain work experience, strengthen specific skills or trying new jobs and thus supporting job reallocation Finally, PrEAs offer flexible working opportunities at every stage of a worker’s professional life and as such provides solutions to an increasing demand for flexibility to match specific lifestyle choices or personal constraints.

Market power and competition As noted in section 2.3.1, the main competition issue in the PrEA industry is the ‘unfair’ competition the sector experiences from other forms of flexible employment. For the sector to fully develop its potential in contributing to a better functioning labour market, Eurociett promotes the lifting of the unjustified discrimination against these other forms of flexible employment. Another form of unfair competition is illegal/undeclared work, whereas companies employ temporary workers while not respecting legal provisions regarding their rights and working conditions. The industry supports any effort to fight against these illegal abuses, and calls government/local authorities to relevant undertake actions to thwart such practices. Market share data from different Member States show that several national PrEA markets are highly concentrated, which could potentially lead to market power abuse. However, we found no indications of such abuse and it is beyond the scope of this study to analyse this issue in further detail. Information asymmetries Information asymmetries arise when buyers and sellers are not well informed of the services to be provided or where information is not equally distributed between them. The Eurociett report points out that the PrEA industry is confronted with several (mis)perceptions about the working of the industry (see also section 5.3.1). These misconceptions may be at the basis of a limited cultural and social acceptance of the industry in some European countries, as well as be one of the reasons for the low use of TAW in SMEs in many countries. These misconceptions hamper not only the relationship between the buyer (client companies) and seller (PrEAs), but also between the PrEAs and potential temporary agency workers, the PrEAs and trade unions, and even between the PrEAs and governments – although the relationship with this last has improved considerably over the last few years. A large part of these misconceptions are driven by information asymmetries that exist between on the one hand the client companies making use of TAW and TAWs/trade unions/government on the other hand. Especially lack of clarity/understanding about the reasons of client companies to make use of TAW – supported by some cases of ‘abuse’ of TAW – feed perceptions of client companies using TAW to support flexibility

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particularly in hiring and firing workers. This has certainly inspired regulatory authorities in the past to intervene and (over)regulate the PrEA industry. Consequently, finding a good balance between protecting TAW workers and providing/supporting flexibility of firms remains a key policy issue for the PrEA sector. 4.4.2 Screening against policy initiatives Table 11 provides an initial screening of the PrEA industry against existing and potential EU horizontal ‘industrial’ policy initiatives74, and a number of additional possible services related initiatives. This attempts to identify those policy initiatives that, if introduced or extended, could be of most relevance for the PrEA industry, in particular in terms of raising performance (e.g. productivity improvements) and/or creating opportunities for sector development.

74

Based on the Mid-term Review of Industrial Policy, COM(2007) 374.

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Table 10

Private employment agencies: screening of framework conditions Regulatory & ‘other’ framework conditions Heading Item Issues Relevance Sector -level Industryservice interactions
Impact on costs and work organisation of labour regulations (minimum wage, working conditions etc) and income tax

National regulatory measures

and social security payments National regulatory measures limiting the use of PrEA services Existence of national regulatory measures that discriminate TAW against other flexible forms of employment.

EU regulatory Regulatory conditions Completion of internal market legislation Industry and professional regulations and standards Knowledge: R&D, innovation and development measures

EU Temporary Agency Work Directive Posting of Workers Directive (96/71) Directive 91/383 about health and safety at work PrEA industry is still excluded from the EU Services Directive at the moment

Industry and professional regulations are largely national issues Existence of sectoral bans, restrictions on ‘reasons of use of TAW’ in several Member States Eurociett’s European Code of Conduct ICT developments as driver/enabler of organisational and process innovation in PrEA industry

Shrinking labour force means both opportunity and

Labour force, knowledge and skills ‘Other’ framework conditions Market access (trade and investment)

challenge for PrEA industry Skill requirements for TAW expected to raise in the future as a consequence of ‘war for talent’

National regulation on delivery of PrEA services conditional to having local branch

Increased demand from companies for flexibility to remain competitive in globalising economy

Structural change

Increased demand from individuals for flexibility to balance work life-personal development Shrinking labour supply due to demographic change

Competition policy issues Technological change Social and Exogenous conditions demographic change Global competition No or limited relevance Relevant Important Very important

‘Unfair’ competition from other forms of flexible employment

Shrinking labour supply due to demographic change will have large impact on (the sort of) demand for PrEA services, but also put pressure on PrEAs itself Services provided locally Large global/multi-national players versus small local (niche) players

-

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Table 11

Private employment agencies: screening of policy initiatives EU policy areas Heading Initiatives Sector issues
Due to existing barriers to a proper functioning of the internal market, trade policy is not of high relevance to the PrEA industry at the moment. However, if the

Relevance

Trade policy Trade

market will become more harmonized in the future, trade policy will be of much more relevance to ensure free trade of PrEA services and international mobility of workers. The PrEA industry is excluded from the EU Services

-

Proper functioning of the internal market

Directive Many regulatory barriers still exist that prohibit ‘free trade’ of PrEA services within the EU. Unlike many other services, the public sector is not an important driver of demand for PrEA services in several countries, as the use of TAW in public

Public procurement

services is strongly limited or prohibited. However, in countries such as the UK the public sector plays an important role in the development of the PrEA industry Although there no direct indications of competition

Better regulation Competition policy

issues within the industry, the high market concentration in several Member States might demand a closer monitoring. In so far as they improve the conditions to balance

-

Better regulation and simplification

good working conditions with flexibility for firms Lifting of ‘unjustified’ restrictions on PrEA activities, such as sectoral bans and restrictions on ‘reasons of use’, would create many extra TAW jobs.

Technical standards Other standards Health and safety Research and development Intellectual property rights Innovation policy Knowledge and skills Employment, qualifications, skills / Flexicurity Access to finance / risk capital Energy and environment Structural Change Waste, water, air Intensive energy use Anticipation Tertiarisation Organisational and services innovation Support for knowledge intensive business services Measurement and recognition
Organisational and process innovation to enhance working practices and conditions and promote productivity growth Increasing demand for more skilled TAW jobs expected Important role for PrEAs in realising the flexicurity model European Code of Conduct, professional qualifications and training standards

-

-

-

-

Services

-

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of intangible assets Regional actions (demand and supply matching) No or limited relevance Relevant Important Very important
Co-operation between PrEA industry and public employment institutions to better match supply and demand in labour market

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Figure 38

Private employment agencies: number of companies by country, 2005 (Eurostat estimates)
25,000

20,000

15,000

10,000

5,000

0

PL

UK

NL

DE

FR

ES

SE

IT

RO

GR

AT 844

HU 832

DK 745

FI 668

NO 663

IE 592

PT 542

BE 501

BG 269

EE 169

LT 147

LV 143

SK 99

SI 93

LU 89

CY 52

Companies 21,053 17,185 6,505 4,268 3,349 2,961 1,794 1,434 1,411 1,058

Source: Eurostat SBS

Figure 39

Private employment agencies: turnover by country, € million 2005 (Eurostat estimates)
45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

UK

FR

NL

DE

IT

ES

BE

AT

SE

NO

IE

DK 962

PL 934

PT 859

FI 762

HU 476

LU 240

GR 139

RO 91

SI 80

EE 67

SK 58

LT 24

LV 18

BG 14

CY 4

Turnover 39,788 23,328 12,656 11,335 4,844 4,282 3,752 2,113 1,616 1,308 1,248

Source: Eurostat SBS

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Figure 40

Private employment agencies: employment by country, 2005 (Eurostat estimates)
900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

UK

FR

DE

NL

ES

IT

BE

PT

PL

AT

DK

SE

HU

NO

FI

LU

RO

IE

SK

EE

GR

SI

BG

LV

LT

CY 138

Employed 807,08 634,35 415,92 384,64 262,11 220,67 118,13 73,142 57,579 53,279 52,020 46,308 35,433 26,181 20,572 16,145 15,997 13,125 4,493 4,218 3,869 3,359 3,052 1,840 1,706

Source: Eurostat SBS

Figure 41

Private employment agencies: share of total non-financial and non-utility business economy turnover by country, 2005 (%)
1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00
Share of NFNUBE turnover

NL 1.25

UK 1.23

FR 0.78

BE 0.54

AT 0.48

IE 0.40

LU 0.39

NO 0.31

DE 0.31

SE 0.30

PT 0.29

FI 0.26

DK 0.25

ES 0.23

EE 0.23

HU 0.23

IT 0.20

PL 0.19

SI 0.14

SK 0.08

RO 0.07

LT 0.06

LV 0.06

GR 0.05

BG 0.02

EU* 0.55

Source: Eurostat SBS

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Figure 42

Private employment agencies: share of total non-financial and non-utility business economy employment by country, 2005 (%)
9.00

8.00

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00
Share of NFNUBE emp

NL 8.27

LU 7.91

BE 4.96

UK 4.49

FR 4.47

DK 3.07

AT 2.28

PT 2.25

NO 2.06

DE 2.04

ES 1.97

SE 1.78

FI 1.69

IT 1.48

HU 1.44

IE 1.35

EE 1.09

PL 0.78

SI 0.60

SK 0.51

RO 0.41

LV 0.30

LT 0.20

BG 0.17

GR 0.16

EU* 2.62

Source: Eurostat SBS

Figure 43

Private employment agencies: market penetration rate, 2006

Source: Eurociett report (2007)

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Figure 44

Evolution in agency work penetration rate (daily FTE as % of total employment), 1996-2006

Source: Eurociett report (2007)

Figure 45

Growth of temporary agency workers industry, 1996-2006

Source: Eurociett report (2007)

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Figure 46

Private employment agencies: breakdown of activities, 2005 (estimates for 5 member states)

100% 14,0% 80%

10,0%

7,0%

0,1%

0,0%

60% 86,0% 90,0% 93,0% 99,9% 100,0%

40%

20%

0% UK NL TAW
Source: Eurociett report (2007)

DE HR additional services

FR

ES

Figure 47

Private employment agencies: level of industry consolidation, 2005
100% Others 90% 80% 70% V edior 60% Rands tad 50% Manpow er 40% USG People 30% 20% A dec c o 10% 0% FR Sh ar e o f T o p 5 (%) 83 NL 74 BE 69 ES 59 DE 31 UK 20 V edior Manpow er A dec c o A dec c o USG People V edior A dec c o V edior Manpow er A uto V is ion ZA G Tuja Hay s Pers ona Serv ic e Rands tad V edior Manpow er A dec c o MPS Hay s V edior Manpow er A dec c o Rands tad Rands tad Others Rands tad Sy nergie USG People Crit Others Others Oly mpia AB Others

Others

C o n ce n tr ate d m ar k e t d o m in ate d b y lar g e g lo b al p laye r s

Fr ag m e n te d m ar k e t w ith lo cal p laye r s

V e r y fr ag m e n te d m ar k e t

Source: Eurociett report (2007)

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Figure 48

Private employment agencies: breakdown of number of companies by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

FR 7.2 34.1 10.5 18.3 26.5 3.4

DE 12.1 19.8 9.0 19.7 32.9 6.5

AT 14.5 33.3 10.9 20.1 17.2 4.0

LI 15.6 63.9 12.2 4.1 4.1

EE 16.6 53.3 12.4 11.2 5.3 1.2

LV 16.8 60.8 5.6 12.6 3.5 0.7

SK 18.2 27.3 18.2 14.1 22.2

PT 29.0 18.6 7.7 13.3 20.3 11.1

SI 30.1 41.9 8.6 6.5 8.6 4.3

NL 34.9 41.2 10.5 6.9 5.1 1.5

FI 38.2 26.2 9.1 15.6 8.5 2.4

LU 42.7 19.1 1.1 1.1 20.2 15.7

DK 43.6 18.0 7.5 11.1 14.9 4.8

NO 44.2 26.1 9.8 8.4 8.4 3.0

HU 48.4 22.4 7.9 8.4 12.9

ES 52.6 22.8 7.4 5.6 7.7 4.0

CY 53.8 46.2 0.0 0.0 0.0 0.0

RO 54.5 38.2 3.0 1.4 2.0 0.9

SE 56.1 27.3 6.0 5.4 4.3 0.9

IT 62.4 28.4 2.5 1.7 1.2 3.8

GR 87.7 10.5 0.7 0.5 0.7

PL 93.7 5.8 0.2 0.1 0.1 0.1

EU* 60.7 19.7 4.8 5.8 7.2 1.8

Source: Eurostat SBS

Figure 49

Private employment agencies: breakdown of turnover by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

FR 0.4 1.4 1.1 4.1 16.7 76.3

IT 1.3 2.8 1.5 1.8 2.1 90.4

PT 0.3 1.6 1.7 6.5 20.7 69.1

ES 0.7 3.8 1.9 5.3 12.5 75.7

DE 0.3 2.3 3.0 7.5 38.0 49.0

AT 0.5 3.6 2.6 11.6 28.9 52.8

NO 2.2 4.6 5.0 10.0 21.2 57.0

SE 3.8 8.5 5.1 8.9 20.6 53.0

NL 3.9 9.7 6.0 8.6 16.0 55.8

FI 1.7 5.8 6.8 14.3 23.4 48.0

HU 7.5 8.0 7.3 12.1 65.1

SI 4.7 18.2 6.0 9.8 21.4 39.9

EE 1.6 16.5 9.2 19.3 53.3

RO 3.4 25.1 1.0 18.4 19.1 33.1

LI 0.4 26.7 15.4 13.3 44.2

SK 8.3 22.8 20.9 7.8 40.2

GR 29.3 32.8 3.2 3.7 30.9

PL 63.0 11.7 1.8 2.2 2.9 18.4

EU* 2.4 4.2 2.9 6.3 19.4 64.7

Source: Eurostat SBS

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Figure 50

Private employment agencies: breakdown of employment by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

IT 0.4 0.6 0.2 0.3 1.0 97.4

ES 0.6 1.0 1.1 2.1 10.4 84.8

PT 0.2 0.6 0.8 3.2 16.8 78.4

FR 0.0 0.8 0.8 3.2 16.5 78.6

DE 0.1 0.8 1.4 6.5 38.9 52.3

NO 0.6 2.9 3.5 6.6 18.7 67.8

AT 0.2 1.9 2.4 10.3 29.3 55.8

SE 4.5 5.1 4.0 8.4 21.5 56.5

NL 1.8 9.6 5.6 5.6 14.6 62.8

RO 4.8 11.8 3.6 3.5 20.5 55.8

FI 1.1 3.9 4.1 16.7 25.3 48.9

EE 0.8 10.1 7.5 16.6 64.9

PL 41.6 7.7 1.1 1.5 4.2 43.8

LV 1.2 25.2 5.5 26.9 23.2 18.0

EU* 1.7 2.9 2.0 4.5 18.4 70.5

Source: Eurostat SBS

Figure 51

Private employment agencies: share of personnel costs in value of production, 2005 (%)
100 90 80 70 60 50 40 30 20 10 0
Share of personnel costs in production

PL 23

SK 29

LV 36

NL 37

UK 46

BG 50

CY 50

RO 50

LT 51

GR 55

SI 56

IE 56

EE 69

DE 73

HU 73

SE 74

NO 74

DK 74

FI 75

AT 78

PT 82

IT 82

BE 84

ES 86

FR 86

LU 95

EU* 63

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Figure 52

Private employment agencies: share of personnel and other costs in turnover, 2005 (%)

95%

75%

55%

35%

15%

-5%
Gross operating surplus Personnel costs Purchase of goods and services (not for resale) Purchases of goods and services (for resale) Other

LU -2 94 7 2 0

FR 2 87 8 0 3

ES 5 86 9 1 0

BE 5 84 11 0 0

IT 1 84 15 0 0

PT 3 82 16 0 -1

FI 9 75 17 0 -1

DK 6 75 20 1 -1

NO 5 74 21 0 0

SE 0 73 27 0 0

DE 12 70 13 4 0

EE 5 69 19 0 7

HU 6 59 16 20 0

SI 5 56 27 0 12

RO 15 50 33 1 1

CY 24 50 26 0 0

BG 6 50 46 1 -3

LT 10 49 42 3 -3

UK 27 46 26 0 0

GR 1 43 21 0 36

NL 7 36 20 0 37

LV 15 36 41 0 7

IE 10 33 16 41 0

SK 29 29 42 1 0

PL 25 23 34 1 17

Source: Eurostat SBS

Figure 53

Private employment agencies: turnover per person employed (€ thousand), 2005
100 90 80 70 60 50 40 30 20 10 0
Turnover per worker

BG 5

RO 6

LV 10

PT 12

SK 13

HU 13

LT 14

LU 15

EE 16

PL 16

ES 16

DK 18

IT 22

SI 24

DE 27

CY 28

BE 32

NL 33

SE 35

GR 36

FR 37

FI 37

AT 40

UK 49

NO 50

IE 95

EU* 33.9

Source: Eurostat SBS

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Figure 54

Private employment agencies: gross value added per person employed (apparent labour productivity) (€ thousand), 2005
45

40

35

30

25

20

15

10

5

0
V.A. per worker

BG 3

RO 4

LV 5

SK 7

PL 8

LT 8

HU 9

PT 10

EE 12

LU 14

NL 14

SI 14

ES 15

DK 15

GR 16

IT 19

CY 20

DE 23

SE 26

BE 28

FI 31

FR 33

AT 33

UK 36

NO 39

IE 41

EU* 25.7

Source: Eurostat SBS

Figure 55

Private employment agencies: wage adjusted labour productivity (apparent labour productivity by average personnel costs (%), 2005
250

200

150

100

50

0
Adj. Lab. Prod

GR 54

SE 78

LU 98

IT 101

FR 103

PT 103

BG 104

ES 105

BE 105

NO 106

EE 107

AT 107

HU 107

DK 107

SI 108

FI 110

DE 115

LT 117

NL 122

IE 126

RO 128

CY 135

LV 139

PL 143

UK 156

SK 198

EU* 120

Source: Eurostat SBS

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Figure 56

Private employment agencies: share of part-time employment in total employment, 2005

70,00% 59,87% 60,00% 50,00% 40,00% 30,00% 19,32% 20,00% 10,00% 1,76% 0,00% DK SE ES RO SI 1,11% 16,61%

Source: Eurostat BS 2005

Figure 57

Private employment agencies: turnover per person employed by company size, 2005 (€ thousand)
140.0

120.0

100.0

80.0

60.0

40.0

20.0

0.0 2-49 empl 50-249 empl 250 or more

RO 13.4 5.3 3.4

PL 24.7 10.9 6.8

PT 25.3 14.5 10.3

ES 43.2 19.6 14.6

IT 115.8 44.3 20.4

DE 40.0 26.6 25.5

NL 38.6 35.9 29.2

SE 44.9 33.4 32.8

FR 50.0 37.3 35.7

FI 40.2 34.3 36.4

AT 48.3 39.2 37.5

NO 75.7 56.7 42.0

EU* 41.5 30.7 26.7

Source: Eurostat SBS

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Figure 58

Private employment agencies: value-added per person employed by company size (€ thousand), 2005
60.0

50.0

40.0

30.0

20.0

10.0

0.0 2-49 empl 50-249 empl 250 or more

RO 7.7 4.0 2.5

PL 10.5 7.5 6.3

PT 14.7 12.4 9.2

NL 18.1 17.3 11.7

ES 30.0 17.1 13.7

IT 50.2 30.4 18.1

DE 29.6 22.9 21.1

SE 26.6 26.5 26.0

FI 31.3 29.1 32.1

FR 38.9 32.3 32.3

AT 37.7 32.6 31.9

NO 51.7 47.3 34.8

EU* 25.4 24.4 21.5

Source: Eurostat SBS

Figure 59

Private employment agencies: preferred flexibility solutions to face demand peaks in Belgium

Source: Eurociett report (2007)

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Figure 60

Key reasons for companies to call on TAW in The Netherlands and UK, 2005

Source: Eurociett report (2007)

Figure 61

Private employment agencies: demand structure for TAW (2005)

Source: Eurociett report (2007)

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Figure 62

Private employment agencies: penetration rate by company size for different countries, 2005 (%)

Source: Eurociett report (2007)

Figure 63

Location of the main external personnel related services provider, 2003 (%)

100% 80% 60% 40% 20% 0% DK Same region
Source: Eurostat

DE

LV

SI

FI International

Other region, same country

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Figure 64

Private employment agencies: TAW skills requirements

Source: Eurociett report

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5 Engineering and technical consulting services

5.1

Sector overview
The technical consulting sector mainly covers engineering consulting services and architectural services. In this sector review, while we will focus on the engineering consulting services, it is important to note at the outset that, for statistical analysis, most of the available data aggregates these services alongside architectural services and technical testing and analysis. As described in Koch (2004)75, consulting engineering companies’ core competencies comprise multidisciplinary engineering, project management, construction management, structural engineering, electrical, mechanical, environmental and energy engineering. In addition, technical consultants also perform various other functions. These include, for example, advising on the identification of projects, scheduling, feasibility studies, financing and execution of projects and other technical works. In addition, project and construction management, executing and monitoring the design and construction, procuring contractors and suppliers, administering contracts, assisting the client in acceptance of the works and recruitment of staff are activities performed by technical consultants76. Examples of projects involving technical consulting services include: construction of buildings, infrastructure projects (ports, airports, roads, tunnels, water and sanitation lines), industrial plants, environmental protection projects (water treatment, pollution control), natural resource related projects (mining, oil winning) and planning (urban, transport). According to the European Federation of Engineering Consultancy Associations (EFCA), the distribution of turnover by market segments varies greatly between countries, but buildings, manufacturing, energy and environment are generally found amongst the most important market segments. The sector is very client-driven and during the last 10 years the clients have started to call for larger range of services for the projects, including often e.g. the whole project management process of a large infrastructure project, which includes in addition to the technical consulting parts, some financial, legal, HRM and accounting services. Social and environmental issues have received more attention lately as well leading to a need to include also experts of these sectors in projects.

75

76

Koch, Christian (2004), The Tyranny of Projects: Team working, knowledge production and management in Consulting engineering, Economic and Industrial Democracy 2004; 25;277 EFCA (1995), “In-house engineering consultancy within the public sector”, White book, European Federation of Engineering Consultancy Associations (EFCA)

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5.1.1

Statistical overview (Architectural and engineering activities and related technical consultancy; technical testing and analysis) It is difficult to obtain detailed and disaggregated statistics on engineering and technical consulting services. Available Eurostat statistics combine the engineering and architectural services (NACE code 74.2) with technical testing and analysis (NACE code 74.3). Hence, the statistics described in this sector cover a broader range of services than engineering and technical consulting services alone. According to industry sources (EFCA), there are estimated to be approximately 3.5 million engineers in Europe, of whom around 1 million are estimated to be active in the engineering and technical consulting sector. Eurostat estimates for 2005, which cover 26 countries, indicated total turnover of € 248 billion, 1,758 thousand companies and 2.6 million workers (see Figure 65 to Figure 67). To a large extent, the relative size of the sector, in terms of turnover and employment numbers, corresponds to the relative economic importance of countries, with the UK, France, Germany and Italy having the highest turnover and employment in the technical engineering and architectural sectors in Europe. On the basis of calculations using Eurostat data, the sector accounted for approximately 1.2% of total turnover, and 2.1% of total employment in the non-financial and non-utility business economy (NFNUBE)77 of the EU in 2005 (see Figure 68 and Figure 69). The firm structure of the sector is characterised by a prevalence of small companies. Eurostat data that indicate that three-quarters of companies in the sector have only 1 employee, and a further 20% of companies have between 2 to 9 employees (see Figure 70); in this respect, Italy stands out among the larger EU Member States as having a very large number (and proportion) of micro-firms in the sector. Although these smaller companies account for a less than proportionate share of turnover (and total employment), it remains the case that they nonetheless account for over half of total employment and two-fifths of total turnover in the sector (see Figure 71 and Figure 72). By and large, the market structure of the sector appears to be relatively unconsolidated in terms of the shares of larger companies in total turnover and employment. Among larger EU Member States this apparent lack of consolidation is particularly evident in countries such as Italy, Germany, Spain and Belgium. By contrast, there appear to be greater levels of consolidation in the Scandinavian countries, France and the Netherlands78. The pattern of industry concentration described above, is also evident in terms of the ‘nationality’ of the leading engineering consulting companies in Europe, with France, the United Kingdom, the Netherlands and the Nordic countries have most of the leading companies in the sector (Table 12). One inference that may be drawn from these findings is that market conditions (e.g. various regulative barriers (such as limitations on who can work in the market) in countries such as Germany, Italy and Spain may not be optimal for creating strong, globally competitive consolidated companies.

77

78

Defined as NACE Sections C, D, F to I and K. More normally the non-financial business economy (NACE Sections C to I and K) is utilised as a reference, but as data on the ‘utilities sector’ (NACE Section E) is missing for some countries the definition ‘non-financial and non-utility business economy’ has been used. Data by company size are not available for the UK.

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Table 12

Top 15 architectural and engineering consulting companies in Europe No Company Country Turnover, 2006, € million 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Altran technologies WS Atkins plc Arcadis Group Fugro N.V. Mott MacDonald Group Assystem Group S.A Alten Group Mouchel Group ARUP Group WSP Group plc Pöyry Group Ramboll Group Halcrow Group ltd Segula Technologies Engineering Group Scott Wilson Ltd plc France England Netherlands Netherlands England France France England England England Finland Denmark England France England 1495,4 2418,6 1233 1434,3 902,8 642,1 576,3 661,7 700,7 659,2 623,6 529 484,6 356 385 Ave. number of employees, 2006 16605 15865 9685 9262 9205 8521 7620 7065 6825 6355 6038 4905 4813 4800 4482

Source:

Consolidation of the sector has been a trend for around 10 to 15 years. There are very large, global companies, which provide their clients with multidisciplinary services − where technical solutions per se can represent often only a small fraction of the services offered. However, in total number, SMEs still form the largest proportion of companies, together with independent experts (self-employed), although their number has been decreasing in recent years and many small companies have become niche players or perform only certain technical consulting activities. These include, for example, small technical consulting companies specialised in serving some specific manufacturing sectors − such as automobile or aerospace sector. The smaller players in the sector are often more localised, while larger companies undertake projects both at home and abroad.

5.2
5.2.1

Competitiveness analysis
Labour supply, costs and conditions The technical consulting sector is a high skilled labour-intensive sector, with relatively high wage levels. Unsurprisingly, a large proportion of those employed in these sectors are engineers, but the range of different types of engineer is wide − including e.g. nuclear engineers, environmental engineers, construction engineers, etc. This wide diversity is also reflected in the range of engineering training, with a study by FEANI79 indicating that there are around 10 000 different curricula for engineers in Europe. Even though engineering knowledge forms the bedrock of the skills requirements for the sector, the widening scope of services requested from technical consulting firms means that other
79

Fédération Européenne d’Associations Nationales d’Ingénieurs

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professionals are increasingly hired in the sector including, for example, lawyers and financial managers. 5.2.2 Apparent labour productivity According to Eurostat data, personnel costs represent around 30 percent of total production in the architectural, engineering and technical services sector (see Figure 73). It may be necessary to treat this figure with some caution, however, due to the prevalence of micro-enterprises in the sector80 and it would appear from a brief review of annual reports of some major technical consulting companies that personnel costs form a significantly higher share of overall costs/production. In addition to the labour costs, acquisition of new technology and maintaining of existing technology are found to be important cost components. The average turnover per person employed in the sector in Europe was around €96.3 thousand in 2005 (see Figure 74) and the value-added per person employed amounted to €48.2 thousand (see Figure 75). Large differences exist between the EU Member States, with average turnover per person employed ranging from only €18 thousand in Romania and Bulgaria to €162 thousand Denmark, and value-added per person employed ranging from €5 thousand in Bulgaria to €72 thousand in the United Kingdom. It is clear that the wide differences in wage levels across the EU-27 have a large impact on these differences. However, even when adjusting apparent labour productivity for wage differences, a significant variation across countries remains (see Figure 76)81. Again (see Section 2.2.1) we can see that by and large apparent labour productivity is relatively low in those countries with relatively high proportion of micro-companies in the sector (e.g. Belgium, Italy, Greece), while it is relatively high in many of the new Member States and notable, among older Member States, in the UK and Ireland. 5.2.3 Productivity enhancement Most of the productivity enhancements in the sector take place through new technological and organisational innovations and improvements. As a knowledge intensive service sector, the effectiveness and efficiency of the technical consultants is mostly related to how fast, with what kind of budget and with how good quality (including the actual level of their technical advices and the satisfaction of the clients) they can offer their knowledge services to the clients. Typical innovations in the sector that improve the actual effectiveness of the services include e.g. new software products used to manage projects and clients more efficiently, new database systems improving data transfers between the consultants and the clients and new organisational innovations for knowledge management82. These technological and organisational innovations in the sector can be acquired via two main routes: through external acquisition of new technology (or ideas)
80

81

82

To some extent the low share of personnel costs in countries with a high proportion of micro enterprises may reflect the fact that remuneration to the ‘owner’/entrepreneur is included under operating surplus rather than personnel costs. Apparent labour productivity is estimated by the ratio (%) of value-added per employee to average personnel costs per employee. Under normal circumstances this ratio should exceed 100%, since average value added (which includes personnel costs) should be greater than average personnel costs. The greater the ratio (in excess of 100) then proportionally the greater the value added per employee created in addition to the cost of their labour. Ojanen, Salmi & Torkkeli (2007), Innovation patterns in KIBS organisations: A case study of Finnish technical engineering industry, 40th Hawaii International conference of system sciences.

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or through internal innovations and ideas. Due to the importance of internal innovations and knowledge in production enhancement, knowledge management has received plenty of attention in the recent technical consulting literature and it has been found to be an important source of productivity enhancements (see also Section 5.3.2). Outsourcing and off-shoring of activities have also been increasingly used in the sector due to the productivity and efficiency improvements they bring. Outsourcing and offshoring take place especially in large projects; where small parts of the projects can be done more efficiently or with lower cost. Efficiency reasons are often used to outsource the tasks to a more specialised company/expert. At the same time, efficiency and cost reasons have been increasing e.g. the use of Indian companies and experts for more routine tasks (such as e.g. designing). 5.2.4 Demand side conditions Technical engineering consultancy services are provided to a large variety of sectors including, for example, construction, transport, telecommunications, nuclear, etc. In general, it could be said that demand for engineering consulting services is found in nearly every sector. However, the bulk of the work is related in some form to infrastructure projects (water, sanitation, transport etc.) and hence closely related to the construction sector. Demand from both industry and public sector goes up and down in line with general economic cycles, which can leave companies - in particular smaller ones - rather exposed to economic downturns. In a European context, the rather synchronised patter of cycles means that the scope to offset cyclical demand slumps through intra-EU international activities is limited. Meanwhile, looking further a field often requires maintaining close proximity to clients and shifting personnel abroad. The relative importance of public and private markets depends varies across countries in Europe with large variation between the Member States. In some countries the public sector makes extensive use of technical consulting services (e.g. in Denmark) including also service such as the provision of ex-ante project recommendations. At the same time, in some other EU countries the public sector relies more on its own internal resources (i.e. they have often their own engineering departments). This causes large differences in the overall demand for the services of the sector and thus affects partially also the development of the sector in different countries. With regard to public-private-partnership projects, there is quite some discussion as to the real opportunities that they offer and often they are described as being not financially very interesting. In particular, selection of providers for the public sector is seen to be rather time consuming and complicated, with variation existing between the national procurement procedures across Member States and a perception that public markets are not always in practise completely open for foreign bidders. Provider-client relations are largely trust based and the whole sector is very client driven. The relations are often deep and the clients will often select a ‘safe-option’ known provider with whom they have made business already. Private customers have been found to select new providers of technical consulting services based often on the reputation of the company, their networks and current customers and finally even to personal contact with the consultant team (clients frequently want to see the team in advance to judge how

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well they can work with them). In terms of client satisfaction with the technical services provided, it is found that the professionalism of the technical consultants (quality and reliability of the staff, communication skills and courtesy) is one of the most important factors for client satisfaction. In addition, availability of support to the client (‘accessibility’ by the client and enthusiasm in surmounting problems) is also a critical factor. Overall, it can be concluded that professionalism and delivering faultless service to the client in the first place are much more valued by the clients than reactive measures taken to remedy draw-backs subsequent to their occurrence. At the same time, the clients were found to be willing to pay extra if they were happy with the quality of the services and the consultants83. One recent trend in the industrial demand segment for engineering consulting services is for manufacturing companies to (pre-) select only few technical engineering companies as preferred partners. Recently e.g. a large industrial provider selected 25 companies as their future providers. These 25 companies included mainly relatively large companies and, among others, 3 Indian companies. 5.2.5 Competition and business strategies The sector is characterised by rather fierce competition and large number of small companies competing against each other. The recent trend from clients is to demand the “one-stop-shop” type of services, which may also include the transfer of legal liability to the service provider. According to Ojanen et al (2007) 84, increased outsourcing activities by major clients have resulted in even larger assignments and contracts, which often only bigger engineering firms can handle. This again has made the position of small companies even tighter and made it more difficult for small companies to grow larger. However, the larger companies managing the project regularly outsource parts of the projects to smaller (niche) players. In general, outsourcing in the technical consulting sector has become more visible lately and often the labour intensive parts of the work are outsourced or off-shored; for example using Indian engineers for drawing up detailed designs. Thus, intra-industry outsourcing is rather common and most companies are estimated to outsource even a rather large share of their business to other technical consulting companies according to some sector experts. This trend has been accompanied by the consolidations in the sector and decrease in the number of middle sized companies. If these trends continue, this could lead to further segmentation in to large companies and small niche players in the sector. However, the main reasons for the many recent mergers and acquisitions in the technical consulting sector have been found to include (in order of importance): acquisition as a way to penetrate new service/client markets, penetration to new geographic areas, increase in market share and acceleration of company growth85.

83

84

85

Tang, Lu & Chan (2003), Achieving client satisfaction for engineering consulting firms, Journal of management in engineering, October 2003 Ojanen, Salmi & Torkkeli (2007), “Innovation patterns in KIBS organisations : A case study of Finnish technical engineering industry”, 40th Hawaii International conference of system sciences Kreitl, G. & Oberndorfer, W. (2004), “Motives for acquisition among engineering consulting firms”, Construction Management and Economics (September 2004) 22, 691-700

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In general, networking, managing of client relations and, consequently, human relations are vital to remain competitive. Competitive advantage is often achieved in the local markets based on clear insights into market conditions and requirements and based on established networks − trust issues and good relationship to customers are possibly even the most important competitiveness factors. Similarly, knowledge management, HRM and project management have become important aspects of business strategies and competition factors. For example, according to Arias-Aranda (2003) 86, flexibility in the technical consulting operations has a strong positive influence on the efficiency performance measures and a slightly lower, but also positive, effect on customer satisfaction. At the same time, conversely, increased flexibility has negative financial consequences for the technical consulting companies. The often high complexity of the technical engineering projects is again also resulting in high uncertainty and equivocality87 in the sector. 88 5.2.6 Internationalisation According to Ojanen et al (2007) 89, internationalisation in the sector has been going through two main channels: client following and market seeking. In addition, labour supply problems in Europe have been driving companies to set-up subsidiaries abroad (e.g. India), which has a relatively more abundant supply of engineers. However, despite the wide use of ICT, proximity with the client is still important in the sector and mostly the service providers and the clients are located in the same region or at least in the same country (see also Figure 79). Indeed, the bulk of international supply of architectural and engineering services still takes place through commercial presence or presence of natural persons. Due to the need for proximity, larger companies have started to establish local units to serve the clients and also foreign companies have entered the market – including, again, especially some Indian ones. However, it should be noted that foreign companies pose a competition threat only if they establish local units. Internationalisation within Europe has been more evident than companies seeking markets outside Europe, which is seen mainly as a reflection of market access issues and need for FDI operations in order to reach faraway markets. However, it is still common to for service providers to serve foreign operations of existing clients that are already familiar (from the home market) with their services. Especially the bigger technical consulting companies have offices in a large number of countries world-wide. Overall, there are four European companies among the world top 10 of technical consulting companies with Altran Technologies from France holding the third place. Most other companies in the top 10 of world are from the United States and one from Canada. As yet, no company from any of the often cheaper, developing countries has been able to reach the world top 10. The competitiveness of these foreign companies (e.g. Indian) seems to differ also depending of the specific service area inside the sector; they have good competitiveness in areas such as design work, but have less access to the technical
86

87 88 89

Daniel Arias Aranda (2003), “Service operation strategy, flexibility and performance in engineering consulting firms”, International Journal of Operations & Production Management, Vol 23. No .11, pp.1401-1421 "Equivocality" refers to the existence of multiple and conflicting interpretations of issues in the work of technical consultants. Chang & Chiu (2005), “Nature of engineering consulting projects”, Journal of Management in Engineering, October 2005 Ojanen, Salmi & Torkkeli (2007), Innovation patterns in KIBS organisations: A case study of Finnish technical engineering industry, Proceedings of the 40th annual Hawaii International conference on system sciences

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project management segment. However, intra-industry outsourcing of work to foreign companies is increasing. In addition, it is also observed that cross-border trade in architectural and engineering services tends to rise along with the complexity and specialisation of the service involved90.

5.3

Screening of regulatory and other framework conditions
The purpose of this sector is to identify and prioritise the key issues facing the sector both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). The analysis is based around a screening of the sector in relation to the main regulatory and framework conditions91. The overall assessment is summarised in Table 13.

5.3.1

Regulatory conditions and standards Labour standards and regulations European national labour standards and regulations shape the sector most with respect to regulations affecting wages, employment conditions (especially conditions of firing and overtime payments) and social payments, such as pension and social security payments, since these affect directly the costs of companies. The level of regulations varies significantly but, due to the need to be close to the customers, the level of labour regulations is hardly a reason for companies to relocate to other countries. Client sector standards and regulations Standards and regulations of the (manufacturing) client sectors affect the technical consulting sector as well. In every project all the regulations related to the sector or issue in hand need to be taken in to consideration, but they don’t usually cause lot of extra costs for the consultants, but more for the project implementation. The standards and regulations to be taken in to consideration depend naturally of the project and country. However, changes such as new environmental standards, for example, mean that there is often a need to include specific environmental experts on the projects. Other examples of client specific standards that affect the technical consulting sector include, for example, nuclear safety standards and aerospace standards. Sector-level standards and regulations The extent of more technical consulting sector specific regulation varies considerably across countries; for example, the sector is very heavily regulated in Germany, Austria, Italy and Spain. Most of the national regulations place limits on who is allowed to provide technical consulting services (e.g. what degree a person offering the services must have or needed years of experience) and what type of projects a person/company with specific characteristics can supply92. Such regulations provide ‘barriers to entry’ and so there is considerable reluctance from incumbent suppliers to remove regulations that protect their markets. In addition, for example, in France it is prohibited to sell technical
90 91

92

WTO (1998), Council for Trade in Services - Architectural and Engineering Services - Background Note by the Secretariat This analysis is in accordance with the general framework for assessment of regulatory and framework conditions agreed as part of the Framework Contract of Sectoral Competitiveness Studies. For example, in Austria, civil engineers cannot provide certain types of PPP services.

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consulting services by hours − all contracts need to be “lump-sum” contracts without hour specifications. More generally, the very large deviations in the regulations would cause it to be extremely hard to make EU wide regulations in the sector93. Naturally, these types of regulations affecting the sector can have contradictory effects on the profitability of companies and in the structure of the market. According to some sector experts, it has been found that the number of regulations in the sector correlates negatively with profitability of the technical consulting sector. This is also evident in the relatively low competitiveness levels and larger number of companies in Germany and Italy, which have heavy regulations for the sector compared to their neighbour countries with higher competitiveness levels and lower number of regulations. On the other hand, most regulations are posed for the common good or safety in the sector, and their costs should be weighted against their benefits nearly on a case-by-case manner. 5.3.2 ‘Other’ framework conditions Knowledge and innovation Knowledge and innovations form one of the most important competitiveness factors of the sector − in addition to their management. The whole nature of the sector is based on constant innovations and founding new solutions in nearly every project. Most of the projects require specific and new technical, financial, legal and organisational solutions94. Hence, it is via these innovations that most of the value added to the customer is created and, in order to stay competitive, companies in the sector have to maintain their innovativeness and knowledge management at high levels. In addition, the technical consulting sector has to find solutions to even global problems, such as how to create more environmentally friendly technologies and how to find alternatives to oil. In the technical consulting sector, similar to other KIBS sectors, knowledge management is found to be equally important if not even more important than accumulating knowledge95. Yet, in a study on the (service) innovations in the technical engineering industry in Finland, it was found that most innovations still occur as client-led innovations and innovations through services. Typical examples of innovations are related to new organisational models and networks, which help working with the client, and technologybased innovations, such as new software and new technical solutions96. Overall, even though the potential for innovations is mostly high, more resources are often needed. These include first of all, more support in company level for innovations, but secondly, also more financial support from public authorities (e.g. national and local governments). Currently, innovations are concentrated on the large market players. The clients can be hesitant towards changes − they just want things to work − and hence for smaller companies it can be too costly to try to innovate heavily in client projects (unless

93

94 95

96

There was an attempt in 1989 at a possible European Directive on Engineering but there was no agreement; interests at national level were too different to reach a consensus. Syntec-Ingénierie (2008), Livre blanc: L’ingénierie et l’innovation, Mai 2008, Editions Syntec-Ingénierie Mezher, Abdul-malak, Ghosn & Ajam (2005), Knowledge management in mechanical and industrial engineering consulting; a case study, Journal of management in engineering, July 2005 Ojanen, Salmi & Torkkeli (2007), Innovation patterns in KIBS organisations : A case study of Finnish technical engineering industry, 40th Hawaii International conference of system sciences

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this is required) and, on the other side, trying to engage in ‘independent’ innovate on their own can be even more risky and financially too burdening. Labour force and skills There is a global lack of engineers and competition to recruit engineers (between the different sectors that employ them) is considerable. A large number of different type of sectors hire engineers − including, for example sectors such as management consulting services, which often pay better salaries, industry and public sector − and the technical consulting services sector has to compete against them. Under these conditions, young professionals can also be very tough on negotiations. On the other hand, as Koch (2004)97 describes, engineers working in technical consulting sector need more than just technical skills; especially team working, management, communication and language skills are nearly equally important as actual technical knowledge due to the nature of the business. As the sector is characterised by highly innovative projects, most work is based on innovative team work. In addition, the actual projects can be difficult; including large changes in short time, only partial need for full staffing and high use of IT. Naturally, this poses high pressure on the project, knowledge and HRM management. At the same time, the high pressure nature and multi-talent demands can make it even more difficult to find new consultants. In this context, policy actions on the educational sector would be needed for two purposes: 1. To attract more young people to the engineering studies; and 2. To teach more communication, team working and project working skills already during the studies. Market access Architectural services are traded internationally, mainly through the establishment of commercial presence by the foreign supplier in the host country, and usually involve temporary movements of skilled personnel98. Hence, most of the market access issues in the sector are related to these activities. In general, the market barriers are slightly lower in the technical consulting sector than e.g. in architectural services, though the barriers are very similar. In addition, barriers in these sectors are significantly lower than in many other KIBS sectors (such as legal or accounting services). The actual level of market access constrains varies by country and there are significant differences in the barrier levels. The main market access barriers are concentrated around the following issues according to the WTO99: • Main qualifications or licensing requirements (e.g. requirements on the type of education required or number of years of experience); • Restrictions on the form and establishment of commercial presence (e.g. only natural persons or partnerships are allowed, often in joint operation or joint venture with local professionals); • Local presence requirements (a frequently sited barrier);
97

98

99

Koch, Christian (2004), The Tyranny of Projects: Team working, knowledge production and management in Consulting engineering, Economic and Industrial Democracy 2004; 25;277. WTO (2007), Council for Trade in Services - Special Session - Communication from Australia - Negotiating Proposal for Architectural Services, 10/10/2007. WTO (1998), Council for Trade in Services - Architectural and Engineering Services - Background Note by the Secretariat.

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• • •

For natural persons, citizenship or residency requirements, economic needs tests and unduly, onerous and/or non-transparent temporary visa procedures; Requirements to use local services or to employ local professionals; Regulations on access to the profession or the professional title and compulsory membership of professional associations (though more common for architects than engineers) ; Limitations on the scope of activities (e.g. certain architectural services, such as "requests for construction permits" and "technical control of certification" are frequently reserved to architects or special categories of architects, while "design and planning" and "obtaining permits" are often reserved to specific practitioners in engineering services); and Restrictive government procurement practises (e.g. requirements for in-house provisions of architectural and engineering services).

In addition, e.g. the Australian authorities have complained about the following issues in the sector: • Restrictions on repatriation of profits; • Discriminatory taxation practices; • Limited or no recognition of foreign qualifications; and • Non-transparent regulatory environments. Despite the rather low trade barriers inside the EU, many of the barriers listed above are still also concerns in intra-EU trade; these include especially requirements on the main qualifications and limitations on the scope of activities. It should be also noted that, as majority of the people working in the sector are self-employed experts or work in small companies, cultural and regional impediments (e.g. unfamiliarity with foreign markets and lack of training in international matters) can cause large barriers as well. Similarly, even when countries recognize or acknowledge foreign qualifications or licenses, caseby-case judgements may be applied, which can give rise to uncertainty and be timeconsuming. In general, market access issues are still causing competition barriers in the sector, but their level especially in the technical consulting sector is already low compared to many other KIBS sector. Structural change Structural changes in the manufacturing industry and further specialisations in the operations done in-house has led to an increase – albeit small in some cases - in the demand for the technical consulting services and, at the same time, opened doors even for manufacturing companies that have developed technological solutions themselves (such as aerospace and high-tech). If this trend continues, further increases in demand could be expected. However, more demand for technical consulting services is to be expected to be found in the developing countries, which are experiencing larger economic changes and rapid development growth rates combined with need for new infrastructure, buildings and other technological projects. At the same time, a small scale structural change is going on in the technical consulting sector itself due to the larger project requirements from clients and ongoing consolidation.

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Competition issues As mentioned earlier, some competition barriers are caused by the sector specific regulations limiting the entrance to the market. In addition, regulations posed on the advantage of some of the sectors competing with technical consultants, such as architects and construction contractor, can hinder the access of technical consultants to some market segments. For example, in Belgium and France architects are basically in a monopoly position in some sectors due to regulations on who is allowed to provide the services. Otherwise, the large number of small companies in the sector and very limited concentration level indicate a priori a low level of competition issues. Although it may be the case that there is segmentation within the market-place and that competition may be limited for some types of services or size-class segments. 5.3.3 Exogenous conditions and trends Technological change New technology is found to be extremely important in the technical consulting sector, first of all, for the shape of the business, but also for productivity effects. New technology is even needed in order to complete the projects. Staying up to date with the technological changes is hence important for staying competitive. At the same time, new technological solutions can boost the competitiveness of the client industries of technical consultants including, obviously, many manufacturing industries. Haro-Dominguez et al (2007)100 conclude that, firstly, there is a positive relation between the level of absorptive capacity of a company and external technological acquisition in the technical engineering sector. Absorptive capacity is defined as company’s ability to acquire, but also exploit and transform new information and technologies. On the other hand, it is found in the same study that acquisition of new technologies affect productivity and efficiency of technical consulting companies significantly. Obsolescence, misuse and learning time cycles of new external technology affect performance directly as a consequence of lower levels of operations flexibility. Hence the absorptive capacity of companies is found to be an important competitiveness factor in the sector. In addition, absorptive capacity affects the level of internal development of technology positively, increasing hence the innovation capacities of the company. Social and demographic change The ageing population and decreasing labour force in Europe is likely to increase further the problems with labour supply and finding suitable people and, as already has been mentioned there is a European shortage of engineers. Despite a larger share of people in the younger age classes pursuing higher education there seems to be problems attracting young professionals to the technical areas. The number of highly educated migrants in Europe is, again, increasing, which could ease the labour supply problems at least to a limited extent.

100

Haro-Dominguez, Arias-Aranda, Lloréns-Montes and Moreno (2007), The impact of absorptive capacity on technological acquisitions engineering consulting companies, Technovation (27) 2007 417-425

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Global competition As described earlier, global competition in the sector is getting tougher and the developing countries have a vast demand for technical consulting sector services. Some foreign companies have already entered the European market, but the competitiveness of European companies in global competition seems to be still rather high. The number of actual global players is also still limited − though increasing. With the new ICT solution the proximity requirements might decrease slightly, but given the high importance of consultant-client relations on client satisfaction, some extent of proximity is still expected. Due to the rather old history of the sector in Europe and long client-provider relationships, it is still seen to be harder for foreign companies to enter the European market than it is for European companies to enter some of the developing countries markets with less competition (depending, naturally, on the market access possibilities).

5.4

Overview of potential policy issues
The purpose of this section is to identify and prioritise potential areas for European policy initiatives both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). To begin with, we examine the possible justifications for policy intervention, from an economic standpoint. After this, the analysis is based around a screening of the sector in relation to existing industrial policy initiatives and some specific themes relevant to the business services sector; the overall assessment is summarised in Table 13.

5.4.1

Key arguments for policy intervention Social externalities Through the technological solutions developed by technical consultants very large social externalities are created by the sector. For example, cleaner technologies can help to reduce environmental burdens globally. Often the highest social externalities are related to new innovations, and hence provide a possible justification for innovation support programs and financial support for innovation. Similarly, technical consulting sector is often boosting the competitiveness of their client industries and contributing to their development and employment. Market power and competition The market access limitations posed by the national sector regulations might require policy interventions, but this would need a more throughout analysis of the specific regulations causing the barriers and their positive effects as well. On the other hand, earlier attempts to create EU wide regulations for the sector have not been very successful. The large number of companies in the sector keeps also competition up. Information asymmetries Information asymmetries in the sector are caused, similarly to other service sectors, by the lack of information distribution and communication caps between the clients and the consultants. Firstly, the client industries of technical consulting sectors can have a hard time estimating how well the company could actually do the project, especially if some new technology innovations are needed. The clients can have also difficulties judging the actual quality of services provided. Secondly, the clients do not provide always enough

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project specifications for the consultants to judge what they want to be done and how, which can make the creation of technical and financial proposals extremely difficult. Changes in the project specifications are common in the sector and the client might ask for a completely new design in the middle of the project due to earlier communication difficulties. Hence, a need for standardisation and “educating of the client” in the sector is acknowledged. Currently, EFCA is working together with CEN and AFNOR on a study on the feasibility of standardisation in the field. In addition, use of “best practices” especially in the client relations has been increasing. 5.4.2 Screening against policy initiatives Table 14 provides an initial screening of the industrial cleaning sector against existing and potential EU horizontal ‘industrial’ policy initiatives101, and a number of additional possible services-related initiatives. This attempts to identify those policy initiatives that, if introduced or extended, could be of most relevance for the industrial cleaning sector, in particular in terms of raising performance (e.g. productivity improvements) and/or creating opportunities for sector development.

101

Based on the Mid-term Review of Industrial Policy, COM(2007) 374.

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Table 13

Engineering and technical consulting: screening of framework conditions Regulatory & ‘other’ framework conditions Heading Item Issues Relevance Sectorlevel Industryservice interactions National regulatory measures EU regulatory measures Regulatory conditions Completion of internal market legislation Industry and professional regulations and standards Knowledge: R&D, innovation and product/service development Labour force, ‘Other’ framework conditions knowledge and skills Market access (trade and investment) Structural change Competition policy issues Technological change Exogenous conditions Social and demographic change Global competition No or limited relevance Relevant Important Very important
• • • • •

Restrictions on market access Diverting labour and service regulations E.g. environmental regulations cause extra staffing needs to projects Lack of access to other MS markets due to regulatory differences Diverting professional requirements

-

Need to support innovations and knowledge management

Lack of engineers

Persisting issues in market access (though varying between countries) Consolidation of the sector Outsourcing in the sector Numerous regulations causing entry barriers Recent market trends have been forcing larger companies position

New technology and innovations vital for the sector

Demographic change might worsen labour supply Increasing global competition, where market access limitations pose some barriers

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Table 14

Engineering and technical consulting: screening of policy initiatives EU policy areas Heading Initiatives Trade policy Trade Proper functioning of the internal market Sector issues
Market access difficulties remain e.g. due to regulatory differences Variations in the sector specific standards cause entry barriers and deviation in competition positions

Relevance

Public procurement markets across the EU not

Public procurement

totally open in practice Large difference in public demand between Member States Competition barriers to be removed

Better regulation

Competition policy Better regulation and simplification Technical standards Other standards Health and safety Research and development Intellectual property rights Innovation policy

Level-playing field to be maintained along the consolidation of the sector Simplification of regulations related e.g. to professional requirements and qualifications Harmonisation of technical standards Harmonisation of service sector standards (e.g. billing regulations) and professional and qualification standards

R&D support IPR rights important incentive for innovations Support for innovations needed Lack of engineers supply in Europe

Knowledge and skills Employment, qualifications, skills / Flexicurity

Other skills than technical skills also important

Access to finance / risk capital Energy and Waste, water, air

Lack of risk capital for innovations

-

environment Intensive energy use Structural Change Anticipation Tertiarisation Organisational and services innovation Support for knowledge Services intensive business services Measurement and recognition of intangible assets Regional actions (demand and supply matching) No or limited relevance Relevant Important Very important
• • •

Important innovation forms

Knowledge, project and client management most important competition elements

• •

Keeping up and creation of new technology Most valuable assets often intangible, related to e.g. project, client and knowledge management Need for proximity creates problems with regional demand and supply matching

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Figure 65

Architectural, Engineering and Technical Services: number of companies by country, 2005 (Eurostat estimates)
300,000

250,000

200,000

150,000

100,000

50,000

0

IT

ES

DE

FR

UK

GR

PL

PT

SE

HU

NL

BE

AT

RO

NO

FI

DK

BG

IE

SI

LT

SK

LV

EE

LU 987

CY 629

Companies 253,37 100,23 91,688 80,600 60,475 48,307 40,151 33,284 31,189 23,340 17,125 16,971 13,048 9,890 9,849 7,185 5,917 5,425 4,435 3,853 2,077 1,396 1,192 1,135

Source: Eurostat SBS

Figure 66

Architectural, Engineering and Technical Services: turnover by country, € million 2005 (Eurostat estimates)
60,000

50,000

40,000

30,000

20,000

10,000

0

UK

FR

DE

IT

ES

NL

SE

DK

NO

AT

BE

PL

FI

GR

IE

PT

HU

SI

RO 877

LU 556

SK 553

BG 308

LT 258

LV 221

EE 161

CY 110

Turnover 53,523 45,752 36,409 27,367 20,605 11,827 7,908 6,437 6,191 4,942 4,942 3,622 3,523 3,427 2,785 2,651 2,355 1,145

Source: Eurostat SBS

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Figure 67

Architectural, Engineering and Technical Services: employment by country, 2005 (Eurostat estimates)
450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

DE

UK

IT

FR

ES

NL

PL

SE

PT

GR

RO

AT

HU

BE

DK

NO

FI

IE

BG

SI

LT

SK

LV

EE

LU

CY

Employed 416,58 414,25 361,43 333,65 265,09 111,57 108,61 72,668 56,137 53,571 49,357 48,537 47,375 41,932 39,135 33,399 32,161 21,070 17,160 11,913 11,327 10,976 8,157 6,153 4,818 2,295

Source: Eurostat SBS

Figure 68

Architectural, Engineering and Technical Services: share of total non-financial and non-utility business economy turnover by country, 2005 (%)
2.50

2.00

1.50

1.00

0.50

0.00
Share of NFNUBE turnover

SI 1.97

DK 1.69

UK 1.65

FR 1.53

SE 1.47

NO 1.47

GR 1.31

FI 1.19

NL 1.17

HU 1.14

ES 1.13

IT 1.11

AT 1.11

DE 0.98

LU 0.91

IE 0.90

PT 0.90

SK 0.81

LV 0.76

PL 0.75

BE 0.71

LT 0.68

RO 0.67

EE 0.55

BG 0.53

EU* 1.24

Source: Eurostat SBS

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Figure 69

Architectural, Engineering and Technical Services: share of total non-financial and non-utility business economy employment by country, 2005 (%)
3.00

2.50

2.00

1.50

1.00

0.50

0.00
Share of NFNUBE emp

SE 2.79

FI 2.65

NO 2.63

IT 2.43

NL 2.40

LU 2.36

FR 2.35

DK 2.31

UK 2.30

GR 2.17

IE 2.16

SI 2.13

AT 2.08

DE 2.04

ES 1.99

HU 1.92

BE 1.76

PT 1.73

EE 1.58

PL 1.47

LV 1.34

LT 1.33

RO 1.27

SK 1.23

BG 0.98

EU* 2.10

Source: Eurostat SBS

Figure 70

Architectural, Engineering and Technical Services: breakdown of number of companies by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

SK

LV

EE

CY

AT

DE

IE

LI

RO

NL

BG

SI

FR

LU

DK

FI

NO

ES

PL

SE

HU

BE

IT

PT

GR 3.9 0.3 0.2 0.1

EU* 75.3 21.4 1.9 0.9 0.3 0.1

28.5 35.1 35.4 37.7 44.3 45.9 52.0 54.3 55.5 60.3 60.9 63.4 65.4 65.7 70.2 70.8 71.4 75.8 76.1 81.2 82.2 82.8 87.6 87.8 95.6 50.7 44.9 51.7 56.0 49.4 46.1 42.0 34.5 38.2 31.5 34.3 31.0 28.9 25.3 21.6 22.7 23.0 21.4 21.8 16.0 15.7 14.7 11.8 10.6 15.6 13.1 3.0 2.1 5.5 1.5 0.0 8.5 3.3 1.1 0.0 5.2 0.0 1.1 0.0 4.1 1.7 0.5 0.0 5.2 2.0 0.7 0.1 2.9 1.7 1.2 0.1 1.4 6.2 3.6 3.3 1.7 1.1 0.2 4.5 2.4 1.1 0.2 0.6 3.2 1.0 3.6 1.6 0.4 0.0 3.2 1.7 0.7 0.2 4.9 2.9 1.1 0.1 3.9 2.7 1.3 0.4 3.4 2.0 1.0 0.2 3.5 1.5 0.5 0.1 1.6 0.8 0.3 0.1 0.9 0.7 0.4 0.0 1.6 0.8 0.3 0.1 1.3 0.6 0.2 0.0 1.0 1.0 0.4 0.1 0.4 0.1 0.1 0.0 1.0 0.4 0.2 0.0

Source: Eurostat SBS

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Figure 71

Architectural, Engineering and Technical Services: breakdown of turnover by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

DK 9.6 11.9 8.6 9.4 21.0 39.5

IE 6.9 7.0

NL 9.4 11.2

FI 10.4 21.4 10.0 14.5 25.3 18.4

LU

FR

NO 11.6 19.5 13.6 14.0 18.1 23.1

RO 6.8

SE 16.9

ES 20.0 25.9 8.2 10.7 14.5 20.6

SK 9.8

DE 8.5

PL 25.8 22.7 6.6 12.1 19.4 13.4

IT

BE

AT 8.3

LI 5.7

PT 18.6 24.5 13.3 19.6 15.8 8.3

HU

BG

CY 12.6 45.9 23.0 18.5

EE 8.0

LV 5.9

GR 67.2 14.4 5.8 6.3 6.3

EU* 16.8 24.3 10.2 11.6 15.6 21.5

10.4 16.2 22.2 20.8 11.4 8.9 16.2 42.7 26.5 13.2 11.5

28.7 22.2 28.8 21.6 6.2 4.3 7.0 25.0 7.6 17.4 24.9 6.3

24.2 15.4 27.4 30.9 12.3 22.7 14.3 18.7 3.1 21.2 9.8

18.5 20.4 11.4 13.2 43.1 16.1 13.3 29.7

24.3 23.4 17.7 10.8 13.1 11.8 19.3 15.3 18.8 21.8

17.1 28.4 25.8 13.9 12.8 15.6 18.6 34.4 15.1

32.9 27.8 14.5 18.5 17.0 21.8 13.4 14.0 26.2

31.9 20.4 22.5 32.6 20.2 25.7 17.4 15.4 0.0 0.0

0.0

Source: Eurostat SBS

Figure 72

Architectural, Engineering and Technical Services: breakdown of employment by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

DK 10.0 12.3 8.1 12.3 18.0 39.3

FI

RO

FR 9.2 26.6 10.2 12.7 16.0 25.3

SE

NL

NO 12.2 24.7 13.6 12.8 14.7 22.0

GR

IE

LU 12.2 23.6 13.5 18.0 32.7

SK 4.9

LI 10.0

ES 28.8 26.9 7.8 9.1 12.2 15.2

BE

DE

PL

BG

LV 4.8 24.4 26.4 23.5 20.9 0.0

AT

HU

CY 8.8 51.5 24.1 15.7 0.0

EE 9.5 20.1 17.2 15.1 0.0

PT 52.1 7.6 7.5 9.1 2.5

IT 61.4 23.3 3.9 2.8 3.6 5.0

EU* 25.8 27.8 9.8 10.2 12.2 14.2

11.4 11.1 21.4 28.1 10.5 8.9 13.4 10.5 23.7 20.5 19.6 20.9

12.5 18.6 25.0 17.0 10.6 11.9 11.2 12.6 15.3 16.6 25.5 23.4

37.0 13.2 14.4 31.3 4.5 7.9 8.8 11.3 23.2 36.3 12.2

33.5 10.0 21.8 36.2 5.5 14.8 12.3 13.1 18.5 13.6 8.4 12.4

34.2 19.3 30.6 37.1 4.8 7.6 15.7 7.2 21.3 13.2 9.1

11.9 40.5 41.7 26.2 14.5 13.7 8.1 8.6 8.3 10.8 5.7

24.4 26.3 27.2 15.0 11.6 19.2 31.9 29.6

38.1 21.2

Source: Eurostat SBS

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Figure 73

Architectural, Engineering and Technical Services: share of personnel costs in value of production, 2005 (%)
50 45 40 35 30 25 20 15 10 5 0
Share of personnel costs in production

IT 11

BG 15

PL 18

SK 19

LV 21

PT 23

SI 23

BE 24

RO 26

LT 28

HU 28

UK 33

ES 34

DK 34

FR 34

NO 36

AT 37

EE 38

IE 38

NL 38

FI 40

GR 42

SE 42

DE 43

LU 47

CY 47

EU* 32

Source: Eurostat SBS

Figure 74

Architectural, Engineering and Technical Services: turnover per person employed, 2005 (€ thousand)
200 180 160 140 120 100 80 60 40 20 0
Turnover per worker

RO 18

BG 18

LT 23

EE 26

LV 27

PL 33

PT 47

CY 48

HU 50

SK 50

GR 64

IT 76

ES 78

DE 87

SI 96

AT 102

NL 106

SE 109

FI 110

LU 115

BE 118

UK 129

IE 132

FR 137

DK 164

NO 185

EU* 96.3

Source: Eurostat SBS

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Figure 75

Architectural, Engineering and Technical Services: value added per person employed, 2005 (€ thousand)
100 90 80 70 60 50 40 30 20 10 0
V.A. per worker

BG 5

RO 9

LT 12

LV 12

HU 13

PL 13

EE 13

SK 17

PT 17

GR 22

SI 30

CY 35

ES 39

IT 39

BE 47

AT 52

DE 52

SE 54

LU 54

NL 55

FI 57

FR 58

DK 68

IE 68

UK 72

NO 89

EU* 48.2

Source: Eurostat SBS

Figure 76

Architectural, Engineering and Technical Services: wage adjusted labour productivity (apparent labour productivity by average personnel costs), 2005 (€ thousand)
200 180 160 140 120 100 80 60 40 20 0
Adj. Lab. Prod

GR 75

BE 91

LU 94

IT 97

SE 104

HU 107

FR 114

NL 115

CY 116

DK 119

AT 120

NO 124

FI 125

ES 127

DE 127

SI 130

EE 135

PL 146

BG 149

IE 149

PT 151

LT 153

UK 155

SK 179

RO 183

LV 199

EU* 121

Source: Eurostat SBS

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Figure 77

Architectural, Engineering and Technical Services: turnover per person employed by company size, 2005 (€ thousand)
400.0

350.0

300.0

250.0

200.0

150.0

100.0

50.0

0.0 2-49 empl 50-249 empl 250 or more

RO 20.6 16.8 16.0

EE 25.8 30.2 0.0

LV 28.7 20.0 0.0

PL 32.1 41.3 62.1

HU 62.4 86.6 26.8

PT 74.6 81.9 155.0

ES 79.6 91.9 105.8

DE 78.9 119.6 106.7

SE 107.1 108.7 92.8

AT 93.9 134.0 175.9

FI 111.0 117.0 102.6

NL 114.7 102.6 134.6

FR 114.1 138.6 143.2

BE 138.6 159.0 89.0

IT 98.9 148.8 379.2

IE 94.6 245.7 143.2

DK 150.5 191.8 165.3

NO 171.2 228.5 194.9

EU* 87.3 115.5 136.7

Source: Eurostat SBS

Figure 78

Architectural, Engineering and Technical Services: turnover person employed by company size, 2005 (€ thousand)
120.0

100.0

80.0

60.0

40.0

20.0

0.0 2-49 empl 50-249 empl 250 or more

RO 9.9 7.0 10.1

LV 12.1 12.3 0.0

EE 13.4 17.8 0.0

PL 11.9 19.3 25.2

HU 16.2 24.4 12.1

PT 26.5 33.0 12.3

ES 38.0 46.0 47.2

DE 47.0 70.1 64.0

SE 47.8 57.1 60.0

AT 49.6 62.2 73.3

BE 53.8 64.8 57.0

FR 55.0 59.0 63.2

FI 57.2 58.5 59.9

IT 51.3 106.2 75.8

NL 60.1 57.3 65.3

DK 69.4 70.0 66.9

IE 58.8 97.4 68.5

NO 81.6 101.6 107.7

EU* 44.2 57.7 59.8

Source: Eurostat SBS

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Figure 79

Location of main architectural and technical services providers in the manufacturing industry (by company size), 2003
100% 90% 80% 70% 60% 50% 40% 30% 20% All enterprises (>49 em ployees) 10% 0% LT 3% 0% 2% 4% 0% LV 0% 0% 0% 1% DE 9% 0% 0% 0% FI 1% 0% 0% 1% DK 3% 1% 0% SI SE PL LV 0% 0% 0% 1% 8% LT Enterprises w ith 50-249 em ployees DE FI DK 3% 0% 0% SI SE PL LT 0% 0% 0% 7% 0% LV 0% 1% 0% 4% Enterprises 250 or m ore em ployees DE 5% 0% 0% 0% DK 2% 3% 0% 2% FI 3% 0% 0% 3% SI SE PL

Unknow n Outside EU EU-10 Member States EU-15 Member States Other region, same country Same region

0% 44% 53% 0% 0% 0% 0% 0% 0% 1%

4% 11% 1% 0% 2% 3% 0% 0% 0% 0% 0% 0%

0% 42% 56% 1% 0% 0% 0% 0% 0% 1%

0% 54% 43% 0% 2% 8% 0% 0% 3% 0% 0% 2%

1% 10% 1%

1% 10% 0%

8% 12% 34% 32% 32% 9% 20%

0% 11% 34% 33% 32% 8% 17%

8% 13% 27% 35% 33% 12% 30%

91% 90% 79% 64% 63% 57% 46% 26%

90% 90% 78% 65% 63% 57% 50% 27%

93% 87% 81% 66% 60% 58% 32% 25%

Source: Eurostat SBS

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6 Logistics services

6.1

Sector overview
Logistics services cover a wide range of activities in the supply chain, from the start of the chain (raw materials) to the final delivery of goods and services to the consumer. The Council of Supply Chain Management Professionals (CSCMP)102 defines logistics management as follows: “Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements”103. On the different activities that fall under logistics management, CSCMP notes: “Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfilment, logistics network design, inventory management, supply/demand planning, and management of third-party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution-strategic, operational and tactical. Logistics management is an integrating function, which coordinates and optimizes all logistics activities, as well as integrates logistics activities with other functions including marketing, sales manufacturing, finance, and information technology”. Although logistics services and transport services are separate services, in practice they are often closely linked. Firms that only provide logistics service-related activities are usually referred to as third-party logistics service (TPL) providers. In a report of the United States International Trade Commission104, the differences between the different types of logistics services have been illustrated as shown in Figure 80. TPL providers can provide supply chain consulting or transportation management in combination with one or more of the services in tiers 2 and 3 of the Figure. Transportation management services include storage and warehousing, cargo handling, transport agency services and customs brokerage. Supply chain consulting involves global network design and distribution strategies (determination of warehouse location

102 103

104

Formerly known as the Council of Logistics Management (CLM). For more information, see: http://cscmp.org/default.asp It should be noted that there are many other definitions used. For example the definition of logistics according the European Logistics Association is as follows: “Planning, execution and control of the movement and placement of people and/or goods and of the supporting activities related to such movement and placement, within a system organized to achieve specific objectives.” Source: USITC (2005), “Logistic Services: an overview of the global market and potential effects of removing trade impediments”, Investigation No. 332-463, Publication 3770, May 2005.

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and transport needs), but may also include inventory forecasting and planning, product design strategies, information technology needs assessment, and vendor identification and management.
Figure 80 Illustration of logistics service activities

Source: USITC (2005)

Various academic articles have tried to distinguish different market segments in logistics. For example, Boscacci (2002)105 distinguishes the following four categories of logistics operators: • Chain traditional logistics operator: operator conducting one single activity within a specific chain/product; • Traditional logistics operator: operator conducting one single activity open to a multitude of supply chains/products; • Chain integrated logistics operator: operator covering the activities in the complete supply chain, specialised for a specific supply chain/product; • Integrated logistics operator: operator covering the activities in the complete supply chain for a multitude of supply chains/products. Lai et al. (2004)106 also distinguish four different categories of logistics service providers, based on a survey among firms in Hong Kong. The four categories mainly differ regarding the following factors: a) the degree to which the service providers provide value added logistics services, such as assembly, repackaging, procurement, etc.; b) the degree of technology used, e.g. for tracking and tracing of goods, sent/received notices,

105

106

Boscacci, F. (2002) The sustainable development of the European Logistics Industry: an analytical approach at micro and macro-economic levels, ERSA Conference paper, European Regional Science Association. Lai, K-H, Cheng, T.C.E. and Yeung, A.C.L. (2004) An empirical taxonomy for logistic service providers, in Maritime Economics and Logistics, 6:199-219.

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etc.; and c) freight forwarding. Differences in these factors lead to a distinction of the following four categories of logistics service providers107: • Traditional freight forwarders, who are mainly active in freight forwarding, and have a low capability in providing technology enabled services and value added services; • Transformers, who have a high capability in providing freight forwarding and technology enabled services, and a medium level capacity to perform value added services; • Full service providers, who have a high capability in all three logistics service factors: freight forwarding, technology enabled services and value added services; • Niche operators, who are relatively weak in freight forwarding compared to the other categories, and have a medium capacity in providing technology-enabled and value added services. There are other examples of differentiation between logistics providers, e.g. in their type of alliance to customers, by the extent to which they are geographically-based, by the extent to which they outsource some services themselves, etc. Unfortunately, there is very little statistical information on the shares of the different categories of service providers in the EU. However, especially among the larger firms, there seems to be a worldwide trend towards full service provision, driven by demand from large multinational clients and increased global sourcing of products. Related to this, there is also a clear trend towards consolidation: larger companies are increasingly dominating the market, as large clients prefer to have a limited number of suppliers to reach economies of scale and scope. Small companies often provide only one or a limited number of services, operate in a specific geographic region, or on a niche market (e.g. they specialise in certain client sectors). Outsourcing of logistical services by companies has been a trend over the last 15 to 20 years, mainly because of reasons related to clients' focusing on core competences. The offering of new services by logistics providers has resulted in a rapidly expanding sector over the last decades. In recent years, ‘just-in-time’ manufacturing and e-commerce have also contributed to the expansion of the sector. Hertz and Alfredsson (2003) mention three waves of the development of the third-party logistics (TPL) industry. The first wave was in the 1980s, when traditional transport companies developed into TPL. In the second wave, in the early 1990s, companies such as DHL and FedEx entered the market. In the last and present wave, consultants, financial and/or IT management firms have entered the market, e.g. Anderson Consulting, GE Capital etc.

107

The study in Hong Kong, based on a sample of just over 200 companies, showed the following distribution of companies: traditional freight forwarders: 25%; transformers: 38.5%; full service providers: 27% and niche operators: 8%.

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6.1.1

Statistical overview (Cargo handling and storage; other supporting transport activities; activities of other transport agencies) Partly as a result of the lack of a commonly used definition of logistics, data on the logistics sector are scarce and difficult to compare. Often, for example, it is not clear to what extent transport services and value added services like packaging are included in the statistics. Even within companies, there are differences in views on what constitute logistics services or other services. According to Rebitzer (2007)108, the total turnover of the logistics sector in the EU was €800-900 billion in 2006 and the long-term growth rate of the sector is between 4% and 8%. He estimates that of the total turnover, 40% is accounted for by logistics service companies, while the other 60% are internal activities of companies from the rest of the economy. Eurostat does not present clear figures for logistics services. The major part of logistics services fall under the category of transport, storage and communication, which is further split up into a number of sub-categories. For this report, as the focus is on logistics services and not on transport, we look specifically at the sub-category “Cargo handling and storage; other supporting transport activities; activities of other transport agencies”109. There are other statistical sectors that may also contain activities from the logistics sector, such as "renting of transport equipment", but these cannot be separately identified and are not included in the figures presented in this chapter. Figure 81 to Figure 83 present, respectively, the number of companies, turnover and employment in the sector, along with the turnover growth rate and the number of companies in the sector of “Cargo handling and storage; other supporting transport activities; activities of other transport agencies”. These data indicate that, in 2005, the sector in Europe comprised some 105 thousand companies, with a turnover of €350 billion and employing 2.1 million people. To a large extent, the relative size of the sector in terms of turnover and employment numbers corresponds to the relative economic importance of countries, with the Germany, the UK, France, and Italy having the highest turnover and employment in the sector. As an indication of the weight of the sector in the economy, logistics services accounted for approximately 1.8% of total turnover and 1.7% of total employment in the nonfinancial and non-utility business economy (NFNUBE)110 of the EU in 2005 (see Figure 84 and Figure 85). These data illustrate the importance of the sector for the Baltic States of Estonia and Latvia (and, to a lesser extent, Lithuania) and also for Austria and Germany.

108 109

110

Source: Rebitzer, D.W. (2007) The European Logistics Markets, in European Real Estate Yearbook 2007. This is an amalgam of the NACE Sectors 63.1 (Cargo handling and storage), 63.2 (Other supporting transport activities), and 63.4 (Activities of other transport agencies). Defined as NACE Sections C, D, F to I and K. More normally the non-financial business economy (NACE Sections C to I and K) is utilised as a reference, but as data on the ‘utilities sector’ (NACE Section E) is missing for some countries the definition ‘non-financial and non-utility business economy’ has been used.

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The firm structure of the sector is characterised by a prevalence of small companies, with Eurostat data indicating that nearly 80% of companies in the sector have fewer than 10 employees (see Figure 86). These small companies, however, typically account for a relatively small proportion of total turnover and employment, with the data indicating that firms with 250 or more employees account for nearly 40% of total turnover (Figure 87) and an even higher proportion of employment (Figure 88).

6.2
6.2.1

Competitiveness analysis
Labour supply, costs and conditions Because of the large differences in the sector and the lack of statistical information, it is hard to make general statements about the labour intensity of the sector. Automation of various processes is a clear trend in the market, but, nevertheless, the sector still requires a significant number of employees. Many activities require unskilled or low-skilled labour (e.g. related to manual and transport work), while the managerial and consulting parts of the sector require high-skilled staff. The largest share of employment in the sector is taken up by low-skilled and unskilled labour. There are some problems in finding sufficient and appropriate unskilled and low skilled labour for the sector, partly as a result of general demographic and educational trends in Western Europe, which influence the size of the pool of potential workers. The use of migrant workers from Eastern Europe can partly fill this gap. It is not, however, always possible to use migrants because some tasks require, for example, specific language skills. Equally, there is a general shortage in the EU of highly-skilled people in technical professions, such as engineers. The logistics sector also faces the problem of attracting highly-qualified staff. This problem does, however, not seem to be related to specific characteristics of the sector. In general terms, labour conditions in logistics services are not seen as a major issue for the sector, but the sector is confronted with labour conditions in related sectors, notably transport (e.g. a shortage of truck drivers due to unfavourable working conditions).

6.2.2

Apparent labour productivity Labour costs do not account for a large share of the total costs of the sector, with available data indicating that personnel costs represent around 20-25 percent of total production for the EU as a whole, but with significant differences across countries (see Figure 89). Other costs, such as the renting and operation of warehouses, transport equipment, automated systems etc. generally account for a much higher share of total costs. The average turnover per person employed in the sector in Europe was around €166 thousand in 2005 (see Figure 90) and the value-added per person employed amounted to €61 thousand (see Figure 91), although there are very large differences between EU Member States. Adjusting apparent labour productivity for wage differences (see Figure

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92)111 highlights relatively high productivity in the Baltic States (Latvia, Estonia and Lithuania) and Ireland. Looking across all countries, there is a broad sweep of countries with estimated ratios in the range of 150-200%, for which there is relatively limited divergence in apparent wage-adjusted productivity. A possible explanation could be that, while wages is the Eastern EU Member States are lower, the logistics providers in Western Europe use more automated processes and thus proportionately less labour. 6.2.3 Productivity enhancement Increasing productivity is of crucial important for logistics providers, as they operate in a highly competitive market. Productivity in the sector has two aspects: technology and organisation. Automation and the use of various software systems have clearly increased over the last two decades. This is partly the result of consolidation of the market, which has resulted in fewer and larger firms for which cost savings, notably through the exploitation of economies of scale, are an important element to remain competitive in the market. In addition, the lack of appropriate low-skilled staff seems to have contributed to the increased use of technology in the sector. According to the 2007 Third-Party Logistics report,112 (hereafter TPL-Report) the most used technologies are warehouse management systems (WMS) and transportation management systems (TMS). There is an increasing demand for visibility tools (e.g. tracking and tracing) and web-enabled communication. Radio Frequency Identification (i.e. an automatic identification method relying on storing and remotely retrieving data) is the technology with the highest future expectations, although expectations seem to have decreased somewhat over the last years. Due to the increased attention for software in WMS and TMS, software development of the sector has become increasingly important, and there are various software companies that can now be considered to be part of the logistics sector. Some major software companies like SAP are also active in the logistics market. Regarding organisational aspects of productivity, important elements to enhance productivity of a logistics provider include the location of its warehouses and distribution centres, as well as having a good European or global network. This allows clients to have a limited number of different suppliers, and to get the best value for money. Again, this allows for economies of scale which may be productivity enhancing. These organisational aspects tend to be more related to costs savings, however, rather than productivity increases (see Section 6.2.5). There is also a specific focus on labour productivity in the sector, notably in warehousing, as improvements in this productivity leads to a more efficient, flexible and cost-effective supply chain. The focus on labour productivity has both technical and organisational aspects. Technically, attention is paid to labour productivity simulation and monitoring technologies, and organisationally, warehouses are increasingly involved in late-stage

111

112

Apparent labour productivity is estimated by the ratio (%) of value-added per employed person to average personnel costs per employee. Capgemini, Georgia Institute of Technology, SAP, DHL (2007) 2007 “Third-Party Logistics- the state of logistical outsourcing, results and findings of the 12th annual study”, http://3plstudy.com/

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production operations to ensure a maximum level of efficiency. The sector also uses specific productivity management systems. 6.2.4 Demand side conditions As noted above, outsourcing has been an important demand driver for the logistics sector, mainly from the private sector, but also, to some extent, from the public sector. Within the private sector, it seems that increasing demand for external provision of logistics services exists across all sectors. Demand changes according to economic cycles, but these cycles often differ by client sector (e.g. economic cycles for food are different than for automobiles). Unfortunately, there appears to be little empirical data on the use of logistics services, but it does seem that a high proportion is outsourced. The TPL-Report, which is based on a worldwide survey among 1,568 companies shows that 82% of these companies are users of third-party logistics (see Table 15). As can be seen from the Table 15, domestic and international transportation are the most frequently outsourced services. In Europe, there is relatively more outsourcing of domestic and international transportation, as well as of transportation management and fleet management. Services that are more customerrelated or more strategic seem to be less outsourced. For the same survey, around 90% of the respondents indicated that “logistics represents a strategic competitive advantage for our company.” The respondents also indicate that as a share of total logistics expenditures, the percentage spent on outsourcing will increase. In terms of the factors taken into consideration in the selection of a service provider, the survey indicates that price and quality seem to play a more or less equally important role (see Table 16). The TPL-Report found that more than 85% of the users of third party logistics in Europe considered outsourcing to be successful. By far the most important success factor was considered to be: (i) “personal relationships on an operational level”, followed respectively by (ii) carefully drafted and signed contracts with detailed descriptions of services and performance tracking; (iii) clearly measured improvement in service levels to customers; (iv) peer-to-peer relationships on executive level providing guidance and sponsorship; and (v) clearly measured cost reductions. Among the benefits of the use of third-party logistics service providers are the reduction of logistics costs (e.g. through economies of scale), of fixed logistics assets (no capital needed for logistics-related equipment) and of the average order cycle length. Many of the respondents in the third party logistics report 2007 felt that the use of third party logistics provider has had a positive impact on business process efficiencies and on the customer service to the customer. Strikingly, while more than 60 percent of respondents in all regions indicated that “third party logistics providers provided new and innovative ways to improve logistics effectiveness”, for respondents in Europe this percentage is only 43%.

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The top 5 continuing problems with logistics service providers, as reported by their customers in Europe are the following113: • Service level commitments not realised; • Lack of continuous ongoing improvements and achievements in offerings; • Cost reductions have not been realised; • Lack of project management skills; • Information technology capabilities not sufficient.
Table 15 Outsourced logistics services Outsourced logistics services Domestic transportation International transportation Warehousing Customs clearance and brokerage Forwarding Shipment consolidation Product labelling, packaging, assembly, kitting Transportation management Reverse logistics Cross-docking Freight bill auditing and payment Fleet management Supply chain consultancy Order entry, processing and fulfilment Customer service All regions 83 79 69 67 51 43 34 32 31 31 25 15 14 14 13 Europe 91 87 68 58 51 44 33 41 33 35 18 21 11 7 10 11

Fourth party logistics 11 Source: taken from the 2007 third-party logistics report, www.3plstudy.com

113

Source: 2007 third-party logistics report, www.3plstudy.com

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Table 16

Factors considered in the selection of logistics service provider Factors Price of services Quality of tactical, operational services Expected capability to improve service levels Range of available value added services Capable information technologies Expected ease of doing business Availability of strategic logistics services Global capabilities Knowledge and advice on supply chain innovations and improvements Cultural and strategic fit with logistics provider Ability to deliver end-to-end solutions across supply chain processes and regions Coverage and experience in emerging markets 3rd party logistics vision and investment strategy
Source: taken from the 2007 third-party logistics report, www.3plstudy.com

All regions 87 87 67 62 61 57 54 51 44

Europe 88 86 67 61 54 47 48 52 40

42 40

42 33

35 33

26 29

Contracts Contracts with logistics service providers are usually concluded for between 3 to 5 years (the Third-Party Logistics Report 2007 finds an average contract duration of 3.1 years). According to some sector representatives, there is a tendency to have shorter-term contracts. This poses some problems for the sector, as every contract usually requires specific investments to fulfil a client’s requirements. These investments may become too costly if the duration of the contracts decreases. Rates and compensation details as well as service standards and performance requirements are the main issues addressed in contracts or agreements for third-party logistics. Compared to other regions, there is relatively more attention in Europe for the use of Key Performance Indicators (KPIs) to determine compensation, and for specific goals related to continuous improvement of service provision. Contracts and agreements in Europe do not as often address the issue of renewal of the service beyond the initial terms of agreements as in other regions114. Financial arrangements in contracts mostly frequently use transaction-based fees, but use is also made of fixed-price, cost-plus and gain-sharing approaches. 6.2.5 Competition and business strategies Against a background of high rates of competition in the sector, companies in the sector are in general pursuing two directions for business development: (i) widening the scope of service provided; and (ii) entering niche segments where they may be fewer competitors and a company can earn relatively higher margins.

114

Source: Third-party logistics report 2007.

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Widening the scope of services can relate to the geographical scope (i.e. offering the services in an increasing larger area), but also to offering a wider range of services. However, though there are a variety of possible opportunities for providing more valueadded services, the provision of such services often requires a different kind of relationship with the client, which is more based on trust and intensive collaboration. Building trust and credibility and close collaboration are therefore essential ingredients for this expanded relationships, to deal with fears from clients over loss of control over logistics processes. By contrast, a high degree of customer adaptation for one or a limited number of clients, or focusing on a specific logistics activity (e.g. only warehousing) are the main ways to enter a niche market. It is mainly the smaller companies that are active on the niche markets, while the larger companies offer an integrated package of services. Although there has been a clear trend in consolidation in the sector, the market is still highly competitive. Margins in the sector have gone done over the years. According to some experts, there is fierce price competition. Some companies seem to offer their services at costs or even below cost price. This happens for example in logistics companies with a big transport network: they know that they have a client for their logistics services, this client will also use their transport services, which can make up for the lower margin on logistics. It should be noted that some logistics companies on purpose do not have their own transport network, to ensure their neutrality in their logistics decisions. Client references are also very important in the logistics market, and some logistics firms accept a very low margin to ensure certain client references. The declining margins in the sector have caused some big players to sell their logistics services, for example, TNT sold its worldwide logistics business to a private equity firm in 2006. According to a press release about this sale in the Financial Times, margins in the business have slipped from 6% in the late 1990s, when TNT entered logistics, to below 4% in 2006115. 6.2.6 Internationalisation Internationalisation is an important phenomenon in the logistics service sector, which seems to be mainly driven by the increasing level of international activity of its clients. Clients often prefer to use existing logistics service providers to operate on new markets. According to sector experts interviewed for this report, logistics providers will often only start specific activities in a certain country if and when a client asks for it and, as such, development of the logistics sector goes hand in hand with support to clients’ internationalisation processes. Apparently, it does not often happen that logistics firms expand their networks abroad without being asked for it by a client. Only companies which offer extensive transportation and warehousing services themselves seem to expand their geographical coverage on their own initiative, as for them it is important to be able to offer an extensive geographic network. According to the TPL-Report many global logistics service providers do not handle all the work themselves internationally, but subcontract a lot of their work to local providers in emerging markets.

115

FT.com, TNT sale of logistics division imminent, August 23 2006.

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6.3

Screening of regulatory and other framework conditions
The purpose of this sector is to identify and prioritise the key issues facing the industrial cleaning sector both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). The analysis is based around a screening of the sector in relation to the main regulatory and framework conditions116; the overall assessment is summarised in Table 6.

6.3.1

Regulatory conditions and standards Environmental standards and regulations As the logistics sector is in practice often integrated with the transport sector, environmental standards and regulations have an important impact on the sector. Increasing fuel duties, introducing urban congestion charging and imposing emission taxes are examples of policy measures that have important indirect impact on the logistics sector. For example, the location of distribution centres often depends on the location of production, the location of consumers and the costs of transport. Changes in transport costs due to certain policy measures can therefore have important implications for the decision of where to locate a distribution centre. It can also result in so-called modal shifts, where the choice for a specific means of transportation changes, e.g. the train becomes more attractive if rail track access charges are subsidised while taxes or duties on fuels become higher. Although the EU is active in defining environmental regulations, many environmental policies and regulations are designed at national level. This is because many EU-wide Directives are implemented through separate national regulations in each member state. An example is the charging of an autobahn toll for trucks in Germany since 2005. Other national and EU standards and regulations The situation with regard to other standards and regulations is similar to that for environmental standards and regulations. There seem to be no standards for the logistics sector specifically, but the sector is affected by more general standards and regulations (sometimes called operational standards) when making its logistics decisions. This is the case, for example, for security standards and regulations which often differ across Member States. Furthermore, the request from the US for 100% cargo scanning is another example of a policy measure under consideration that will affect the logistics sector. Other examples of standards, regulations and policy measures that affect the sector include: • Tax and investment policies (e.g. high or low tax rates, subsidies to attract foreign companies) that influence choice over, for example, location of warehouses; • Labour standards, such as rules for maximum number of driving hours for individual drivers; • Different kinds of standards for equipment used in the logistics sector.

116

This analysis is in accordance with the general framework for assessment of regulatory and framework conditions agreed as part of the Framework Contract of Sectoral Competitiveness Studies.

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Client sector standards and regulations The client usually does not impose standards and regulations as such, but the use of Key Performance Indicators (KPIs) is very important in contracts between logistics providers and their clients. These KPIs could therefore also be considered as a kind of standards. Some clients also have requirements for issues such as the software to be used. The use of these ‘standards’ is arranged in individual contracts, however. In addition to the KPIs, relevant standards and regulations depend upon the client’s sector. For example, if logistics services are used by the food industry, the standards and regulation of this sector affect the logistics sector as well. The Hazard Analysis and Critical Control Points (HACCP), a standard to improve food safety is a case in point, as HACCP is not only applicable for the production of food, but also for the packaging and distribution of food. Also the automotive sector has specific standards that need to be taken into account in logistics decisions. Sector-level standards and regulations As indicated above, there are only a very limited number of standards that are directly affecting the logistics sector, and the sector is mainly affected by rules and regulations of its clients sectors and of closely related sectors such as transport. Currently, DG TREN is supporting a four-year research project, called BestLog, which aims to identify best practices in logistics, in order to improve logistics competence across Europe117. This project may indirectly lead to the development of standards (either voluntary or obligatory) if this could improve the quality of services of the sector. DG TREN has also defined a Freight Logistics Action Plan (COM (2007) 607 final), which should contribute to improving the efficiency and sustainability of freight transport in Europe. It consists of studies, stakeholder analyses and other initiatives covering topics such as: the development of generic indicators to measure performance; the establishment of a single window for administrative procedures in all transport modes; identification of areas where EU action such as standardisation is required, etc. Most of this is still ongoing work. The European Logistics Association has developed (voluntary) Standards of Competence for Logistics in 2004118. It is used for certifying individuals in logistics management positions. It is defined in terms of outcomes (i.e. the expectations of the performance of managers, with a distinction between three different levels of management). The standards have been developed and agreed by industry. There is no formal link with education and training programmes in logistics, but it is expected that they will focus on meeting the competence requirements. The rationale for introducing these standards is the following: • A shared wish by countries to achieve a common level of standards for logisticians for mutual benefit; • Portability of logistics skills and competences within Europe (and the world); • Mutual recognition within Europe;
117 118

For more information, see www.bestlog.org For more information, see: http://www.elalog.org/

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• 6.3.2

Establishing a common profile for logistics managers.

‘Other’ framework conditions Knowledge and innovation As logistics operations become increasingly complex as a result of the increasing scope of services provided (notably the provision of value added services), as well as the increasing internationalisation of the sector, the demand for knowledge and innovation is increasing. According to some sector experts, there is, however, a gap in terms what clients expect in terms of knowledge and innovation and what they are willing to pay for. As margins in the sector are decreasing and at a low level, and the duration of contracts also seems to be decreasing, it is very difficult for companies in the logistics sector to innovate. Research and Development departments are scarce in the sector. All investments need a quick and high return on investment: otherwise they pose too many commercial risks. Given the high proportion of small companies in the sector and the limited financial resources these companies usually have, the knowledge and innovation gap between the small and larger companies might be expected to increase in the future. Labour force and skills As indicated in Section 6.2.1, the sector has a large share of unskilled and low skilled workers, especially if the transport services provided by the logistics sector are taken into account. But also in the warehouses a major part of the work force is unskilled or low skilled. The workforce is dominated by male workers. Managers and consultants in the logistics sector are high-skilled workers. Over the last years, there has been increasing attention both for vocational training of the workforce and for professional quality of the workforce. This is among others reflected in the development of standards for logistics managers, as described in Section 6.3.1. Market access As the logistics services is characterised by a high degree of internationalisation, trade and investment regulations are highly relevant for the industry. The sector has already experienced a significant degree of liberalisation over the last two decades, not only as a result of various trade negotiation processes (GATS, FTAs, bilateral agreements), but also because many countries have unilaterally liberalised transportation markets to reduce transport costs and increase economic growth. From a USITC report119, it appears from a survey among international logistics companies that customs procedures and inspections are most important deterrent for trade (e.g. restrictions on the weight and value of shipments, time consuming documentation requirements, inspection requirements, security related delays, etc.). Trade facilitation is therefore an important topic in trade negotiations for the sector, in addition to the specific service sector negotiations for logistics.
119

USITC (2005) Logistic Services: an overview of the global market and potential effects of removing trade impediments, Investigation no. 332-463, USITC Publication 3770, May 2005.

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Negotiations on trade facilitation are under way in the World Trade Organisations, but as the overall negotiations under the WTO are progressing at a very slow rate, there have been no formal agreements on trade facilitation yet. The World Customs Organisation (WCO) is also active in the area, and has drafted a number of international conventions to facilitate customs procedures, but many of them are not yet ratified or are only voluntary. FTAs usually also contain provisions on customs administration. It should be noted that while customs is an issue for EU exporters, it appears that there is also a large degree of variation between customs procedures within EU, which affects both EU and global market players. Next to customs issues, impediments to foreign investments are important for market access in the sector, as most international transactions in logistics require a foreign presence in a country. There are countries that limit or prohibit foreign investment in the sector, or that have complex or lengthy approval procedures. There are also often licensing requirements. For transportation services, these requirements exist for nearly all countries. Another common complaint in the sector is the limited transparency of logistics regulations. Due to sector definition issues, logistics-related impediments have not been separately addressed under GATS in the WTO. Commitments for management consultancy are relatively generous, while commitments for other related services like customs brokerage, rail/road/maritime freight, are much lower. Structural change Structural change in the form of outsourcing of logistics activities has been a driving force for the development of the logistics sector. In addition to this outsourcing trend, there is also the trend of increased global sourcing of its clients. This had led to internalisation and to a further expanding logistics sector. Structural change in the sector itself is reflected in the expanding scope of services (more integrated service provision), notably of value added services. Also the increased use of technology in the sector has led to changes in its operations. Competition issues As indicated before, competition in the sector is quite strong, and margins tend to be low. The market seems quite fragmented, with a number of big players offering a broad package of services, and many smaller companies offering only a specific logistics service or operating on a specific market segment. Despite the market still being fragmented, there has been a clear trend towards consolidation over the last years, partly due to decreasing average margins in the sector. It goes beyond the scope of this report to provide an analysis of existing market conditions, but we have encountered examples of companies offering their logistics services at a very low price, for example to attract more customers for their transport services, or to get some important references. It is not clear if these companies provide their services at very low margins or even below cost price. If the latter would be the case, this cross-subsidisation would require further attention.

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6.3.3

Exogenous conditions and trends Technological change Technological change is important in the sector. One the one hand, technological change that is ‘internal’ to the sector is reflected, for example, in the increased used of automated processes and management software. On the other hand, the sector is also affected by technological change in other sectors. A notable example is the increase of e-commerce, which has provided many opportunities for the logistics sector. Technological change in transport may also become important for the sector. With the climate change and increasing fuel prices, it is likely that there will be technological developments in energy efficient transport for example. This may be important for logistics decisions, and in particularly is at the forefront of discussions on global supply chains in relation to rising oil prices. As transport becomes more expensive due to the increasing fuel prices, companies seem to change their sourcing decisions accordingly and may decide to locate production closer to consumption, which of course also affects the related logistics services. Social and demographic change Demographic change in the form of both possible decreases in the overall size and ageing of the European population is presenting a challenge for the logistics sector in order to attract appropriate staff. This applies for low skilled workers as, for example, it is increasingly difficult to find sufficient people willing to be international truck drivers. But the sector is also affected by the general lack of high-skilled people trained in technical fields. Policies to further promote technical education among young people may help to address this problem. Secondly, there is an ongoing trend towards urbanisation in the EU. This poses a challenge for the logistics sector, as urban areas are putting an increasing number of requirements on transport in urban areas in terms of limits on emissions and noise. This might require a different approach for organising and managing transport to urban areas (e.g. in terms of modal shifts close to the cities). Global competition Competition in the sector is increasing, but the big players in the sector are located in a few regions. The biggest players in the sector are located in the USA and Northern/Western Europe (UK, France, Germany,). Companies in China have become increasingly important in the sector, and there are examples of Chinese companies buying complete parts of the supply chain (e.g. in the port of Rotterdam). Locally and in certain market segments, there are of course many smaller competitors. There also appears to be a shift in location of offices and warehouses. Eastern Europe has, for example, become more attractive as a location for warehouses, not only because labour costs are low, but also because the local population has experienced an increase in purchasing power and the region therefore now also accounts for a sizeable part of EU consumption. Also because fuel prices are increasing, companies source some of their intermediate goods from Eastern Europe rather than from countries at a larger distance,

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because of the transport costs involved, which also makes the region more attractive for logistics operators.

6.4 Overview of potential policy issues
The purpose of this section is to identify and prioritise potential areas for European policy initiatives both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). To begin with, the possible arguments (justification) for possible policy intervention from an economic standpoint are examined. After this, the analysis is based around a screening of the sector in relation to existing industrial policy initiatives and some specific themes relevant to the business services sector; the overall assessment is summarised in 6.4.1 Key arguments for policy intervention Social externalities The logistics sector is very important in the European economy. Many businesses depend on the logistics sector for the timely delivery of their goods and services. Mistakes or delays caused by logistics can have high cost implications. The logistics sector also becomes increasingly important in tracking and tracing of products, and can thereby contribute to corporate social responsibility, as it creates more transparency in global supply chains. Also the call back options that many logistic companies provide if there are problems with a specific product can have important benefits from society, especially if it concerns issues like safety. The return of products along the supply chain is also referred to as reverse logistics. Waste treatment is also an important phenomenon in this reverse logistics (e.g. for the re-use of recycling of material), and in that respect the sector can also have positive effects on the environment. Logistics decisions determine freight transport demands, and as the transport sector is a key driver of CO2 emissions, logistics can help to make transport as efficient as possible. The relatively high use of low skilled labour and also or migrant workers of the sector contributes to employment and in the case of migrants to the integration of migrants into the workforce. Market power and competition Issues of market power and competition revolve around the existence and abuse of market power (e.g. entry barriers, monopolistic competition, etc.) See Section 6.3.2 for a number of issues related to competition. Information asymmetries Information asymmetries arise when buyers and sellers are not well informed of the services to be provided, or where information is not equally distributed between them. In the context of logistics, buyer-side lack of information can relate to the performance of the service provider since this cannot be ascertained in advance. Although KPIs are an important instrument to achieve a minimum level of quality, these KPIs are laid down in contracts and can therefore not be used when selecting a provider of logistics service providers. In addition, there are no commonly used quality standards for logistics

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services. As a result, having references of previous clients and contracts has become a very important way to show the quality of a logistics company. The importance of these references has led some companies to offer their services at very low margins in order to gain specific references, as noted earlier. There has been growing attention for the possible use of standards in the sector to address these problems, as can be seen in the EC’s Freight Logistics Action Plan, and the voluntary standards of competence for logistic managers as developed by ELA. As noted before, the Best Log project may also contribute to this. In the future, there may therefore be more standards that will help to tackle the problem of information asymmetry. 6.4.2 Screening against policy initiatives Table 18 provides an initial screening of the sector against existing and potential EU horizontal ‘industrial’ policy initiatives120, and a number of additional possible services related initiatives. This attempts to identify those policy initiatives that, if introduced or extended, could be of most relevance for the industrial cleaning sector, in particular in terms of raising performance (e.g. productivity improvements) and/or creating opportunities for sector development.

120

Based on the Mid-term Review of Industrial Policy, COM(2007) 374.

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Table 17

Logistics services: screening of framework conditions Regulatory & ‘other’ framework conditions Heading Item Issues Relevance Sectorlevel Industryservice interactions National regulatory measures EU regulatory measures Regulatory conditions Completion of internal market legislation Industry and professional regulations and standards Knowledge: R&D, innovation and product/service development Labour force, knowledge and skills ‘Other’ framework conditions Market access (trade and investment) Structural change
Environmental legislation Tax and investment policy The sector is not covered by specific EU regulation The sector is largely excluded from the Services Directive (services in the field of transport) Harmonisation of national regulations would benefit the sector because of its international nature. Industry and professional regulations are not directly affecting the sector, but the standards and regulations of client sectors impact the logistics sector as well Technological developments in automation and software Organisational and process innovation to remain competitive Lack of low skilled labour Lack of high skilled labour Trade facilitation (customs) Negotiations on commercial presence (FDI) Outsourcing of logistics services Use of new technologies Expanding scope of services

Competition policy issues

• •

Possible cross-subsidisation Some market concentration among larger companies

Technological developments create opportunities for the sector, both external (e.g. e-commerce) and internal (increased efficiency)

Technological change Exogenous conditions

Social and demographic change Global competition

• • • • •

Ageing population Lack of technically skilled people Urbanisation Emerging markets Changing investment locations

-

No or limited relevance Relevant Important Very important

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Table 18

Logistics services: screening of policy initiatives EU policy areas Heading Initiatives Trade policy Trade Proper functioning of the internal market Public procurement Competition policy Better regulation Better regulation and simplification Technical standards Other standards Health and safety Research and development Intellectual property rights
Contribution to supply chain innovation (organisational etc.) Potential effects of market consolidation Harmonisation of national standards and regulations Development of common industry standards and codes of practice etc. Standards in relation to ICT applications and technologies Standards of client sectors

Relevance Sector issues

Trade facilitation Enhancing market access through foreign direct investment (mainly for larger companies) Lack of common sector standards and regulations within the EU (below)

-

-

Innovation policy Knowledge and skills Employment, qualifications, skills / Flexicurity

Enhance client-supplier interface for innovative solutions Access / innovation capacity of SMEs Raising of standards among logistics managers (and indirectly of education) through implementation of professional standards Enlarging of the technically educated workforce

Access to finance / risk capital

For SMEs access to finance an issue to keep up with technological development Role of sector in waste treatment and disposal

Energy and environment

Waste, water, air Intensive energy use

(reverse logistics) Interrelation with transport services

-

Structural Change

Anticipation Tertiarisation Organisational and services innovation Support for knowledge intensive business services Measurement and recognition of intangible assets Regional actions (demand and supply matching) Organisational and process innovation to increase productivity and efficiency

Services

-

No or limited relevance Relevant Important Very important

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Figure 81

Cargo handling, storage and other supporting transport services: number of companies by country, 2005 (Eurostat estimates)
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

IT

DE

ES

UK

GR

FR

PL

NL

HU

SE

BE

NO

PT

RO

BG

DK

FI

AT

LV

LT 849

IE 792

EE 767

CY 573

SK 524

SI 488

LU 150

Companies 17,161 14,182 12,951 10,345 7,836 7,096 6,507 3,565 3,373 2,914 2,479 1,971 1,905 1,836 1,824 1,422 1,357 1,177 1,135

Source: Eurostat SBS

Figure 82

Cargo handling, storage and other supporting transport services: turnover by country, € million 2005 (Eurostat estimates)
80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

DE

UK

FR

IT

ES

NL

BE

SE

AT

DK

NO

FI

PL

PT

IE

HU

GR

RO

EE

LV

LT 890

BG 879

SK 836

SI 770

LU 482

CY 301

Turnover 72,004 57,761 51,286 38,079 28,757 16,858 14,403 13,056 12,931 8,293 7,287 4,721 4,567 4,320 3,766 2,819 2,643 1,805 1,708 1,405

Source: Eurostat SBS

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Figure 83

Cargo handling, storage and other supporting transport services: employment by country, 2005 (Eurostat estimates)
500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

DE

IT

UK

FR

ES

NL

RO

PL

SE

AT

BE

BG

GR

PT

DK

HU

NO

FI

LV

IE

LT

EE

SK

SI

CY

LU

Employed 458,27 302,65 299,65 253,98 187,19 68,617 63,629 61,405 50,899 50,435 44,904 35,981 34,523 31,623 27,995 25,892 25,054 23,069 15,716 15,058 12,411 9,121 8,084 7,152 4,728 2,132

Source: Eurostat SBS

Figure 84

Cargo handling, storage and other supporting transport services: share of total non-financial and non-utility business economy turnover by country, 2005 (%)
7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00
Share of NFNUBE turnover

EE 5.89

LV 4.80

AT 2.91

SE 2.43

LT 2.36

DK 2.18

BE 2.07

DE 1.94

UK 1.78

NO 1.73

FR 1.72

NL 1.66

FI 1.60

ES 1.57

IT 1.55

BG 1.52

PT 1.47

RO 1.38

HU 1.36

SI 1.32

SK 1.22

IE 1.22

GR 1.01

PL 0.94

LU 0.79

EU* 1.76

Source: Eurostat SBS

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Figure 85

Cargo handling, storage and other supporting transport services: share of total non-financial and non-utility business economy employment by country, 2005 (%)
3.00

2.50

2.00

1.50

1.00

0.50

0.00
Share of NFNUBE emp

LV 2.59

EE 2.35

DE 2.25

AT 2.16

BG 2.05

IT 2.04

NO 1.97

SE 1.95

FI 1.90

BE 1.88

FR 1.79

UK 1.67

DK 1.65

RO 1.64

IE 1.54

NL 1.47

LT 1.46

ES 1.41

GR 1.40

SI 1.28

HU 1.05

LU 1.04

PT 0.97

SK 0.91

PL 0.83

EU* 1.70

Source: Eurostat SBS

Figure 86

Cargo handling, storage and other supporting transport services: breakdown of number of companies by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

LV 12.5 64.6 11.9 6.3 3.8 0.8

LI 13.7 59.8 12.5 9.3 3.8 0.9

DE 17.8 43.0 16.2 13.4 7.9 1.6

AT 23.4 47.8 12.1 8.9 6.0 1.8

SK 29.2 50.8 6.1 6.3 6.9 0.8

ES 31.5 49.6 9.1 6.1 3.2 0.6

BG 36.0 52.3 5.6 3.8 2.3

IT 37.0 41.0 9.8 6.7 4.7 0.8

RO 37.7 40.9 8.2 6.9 4.8 1.4

NL 39.6 39.1 8.8 6.9 4.6 1.0

PT 39.8 40.6 9.4 6.2 3.1 0.8

SI 42.0 42.6 5.3 6.4 2.5 1.2

FR 42.1 27.7 9.7 10.8 7.6 2.1

DK 43.3 32.3 10.5 7.7 4.7 1.5

BE 45.3 30.7 8.5 8.9 5.8 0.9

NO 48.7 34.3 8.4 5.3 2.6 0.7

PL 51.1 40.9 2.6 2.6 2.1 0.7

CY 51.3 37.2 5.8 3.8 1.9

LU 51.3 31.3 6.0 4.7 5.3 1.3

FI 53.0 28.3 6.6 6.6 4.4 1.1

GR 55.6 37.3 5.1 1.5 0.6

SE 58.0 25.7 6.8 5.4 3.3 0.9

HU 58.5 30.7 5.1 3.6 1.8 0.3

EU* 37.8 40.5 9.3 7.0 4.3 0.9

Source: Eurostat SBS

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Figure 87

Cargo handling, storage and other supporting transport services: breakdown of turnover by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

FR 4.2 5.3 3.9 10.1 18.3 58.0

AT 1.5 6.2 7.3 9.5 75.6

SK 3.4 8.1 4.6 12.5 59.2 12.1

DE 1.7 7.6 7.8 12.6 23.3 47.1

SE 3.8 9.7 9.4 13.3 23.8 40.0

CY 4.6 11.8 7.9 12.0 63.7

RO 1.6 11.3 9.7 13.9 15.9 47.6

PL 4.6 13.1 6.4 14.0 23.2 38.7

FI 3.5 12.1 10.6 13.6 31.5 28.7

ES 2.4 18.0 8.2 12.3 23.1 36.0

NL 3.4 12.2 10.8 16.1 22.0 35.5

IT 3.7 14.0 11.6 14.9 19.8 36.0

DK 4.3 14.5 9.7 16.2 26.9 28.5

NO 6.3 15.8 10.3 14.8 52.7

BE 5.5 15.3 10.8 18.9 31.9 17.6

HU 4.1 19.0 9.6 25.5 26.0 15.9

GR 7.0 24.4 16.0 14.7 37.9

LI 0.6 24.0 23.7 16.6 16.6 18.6

LV 1.9 26.4 20.5 21.0 30.3

EU* 3.1 10.6 8.3 13.0 19.9 38.7

Source: Eurostat SBS

Figure 88

Cargo handling, storage and other supporting transport services: breakdown of employment by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

AT 0.5 3.7 3.8 6.3 85.6

RO 1.1 4.8 3.2 6.2 15.7 68.9

FR 0.3 3.8 3.7 9.8 22.3 60.1

SE 1.8 7.2 5.9 10.5 22.1 52.5

DE 0.5 6.1 6.8 12.6 24.2 49.8

FI 1.8 7.4 5.3 12.4 28.0 45.0

DK 2.1 6.5 7.4 12.3 27.4 44.2

BE 2.5 6.9 6.7 15.1 32.3 36.6

IT 2.1 9.4 7.6 12.1 28.5 40.4

NO 1.8 11.2 8.9 12.5 20.4 45.2

NL 5.1 8.1 9.3 12.2 24.7 40.6

SK 3.4 14.6 3.9 13.3 37.8 26.9

PL 6.5 18.5 4.0 8.7 22.1 40.2

ES 2.1 14.2 8.5 13.0 22.5 39.7

HU 7.6 15.2 8.9 14.5 24.0 29.7

LV 0.4 22.6 10.9 13.0 26.8 26.3

CY 6.3 17.0 9.4 14.2 53.0

LI 0.9 17.8 11.4 19.4 21.9 28.7

GR 12.6 28.9 15.3 10.2 32.9

EU* 1.8 8.8 6.7 11.3 22.4 43.2

Source: Eurostat SBS

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Figure 89

Cargo handling, storage and other supporting transport services: share of personnel costs in value of production, 2005 (%)
60

50

40

30

20

10

0
Share of personnel costs in production

EE 7

SK 10

LT 11

LV 15

BE 15

SE 16

PL 17

DK 17

NL 18

FR 19

FI 20

NO 20

PT 20

SI 20

BG 21

RO 22

UK 22

IT 23

IE 23

HU 24

DE 32

ES 33

GR 35

CY 41

AT 44

LU 51

EU* 23

Source: Eurostat SBS

Figure 90

Cargo handling, storage and other supporting transport services: turnover per person employed, 2005 (€ thousand)
350

300

250

200

150

100

50

0
Turnover per worker

BG 24

RO 28

CY 64

LT 72

PL 74

GR 77

LV 89

SK 103

SI 108

HU 109

IT 126

PT 137

ES 154

DE 157

EE 187

UK 193

FR 202

FI 205

LU 226

NL 246

IE 250

AT 256

SE 256

NO 291

DK 296

BE 321

EU* 166.3

Source: Eurostat SBS

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Figure 91

Cargo handling, storage and other supporting transport services: value added per person employed, 2005 (€ thousand)
120

100

80

60

40

20

0
V.A. per worker

BG 9

RO 9

LT 19

SK 19

PL 20

HU 27

LV 29

SI 33

EE 34

GR 38

IT 47

CY 49

SE 55

LU 57

ES 59

FI 60

PT 64

FR 67

DE 68

UK 80

BE 82

NL 82

AT 84

DK 88

NO 99

IE 100

EU* 61.3

Source: Eurostat SBS

Figure 92

Cargo handling, storage and other supporting transport services: wage adjusted labour productivity (apparent labour productivity by average personnel costs), 2005 (€ thousand)
500 450 400 350 300 250 200 150 100 50 0
Adj. Lab. Prod

LU 118

SE 123

IT 142

RO 144

FI 148

SI 155

GR 158

BG 158

BE 164

ES 167

FR 175

NO 178

CY 178

AT 180

PL 180

UK 180

NL 182

SK 190

DE 196

DK 203

HU 204

PT 218

LT 235

IE 249

EE 292

LV 431

EU* 175

Source: Eurostat SBS

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Figure 93

Cargo handling, storage and other supporting transport services: turnover per person employed by company size, 2005 (€ thousand)
600.0

500.0

400.0

300.0

200.0

100.0

0.0 2-49 empl 50-249 empl 250 or more

RO 69.5 28.7 19.6

LI 95.0 54.5 46.4

PL 79.8 78.1 71.7

SK 81.9 161.9 46.5

HU 152.1 118.1 58.1

IT 175.3 87.3 112.3

ES 165.9 157.8 139.2

DE 172.6 151.0 148.5

FR 226.7 165.7 195.1

FI 295.3 230.1 130.6

NL 324.6 218.3 215.1

IE 446.7 197.4 144.3

SE 353.5 275.4 195.4

DK 454.5 290.4 190.9

BE 504.5 317.2 153.8

EU* 190.6 140.0 140.8

Source: Eurostat SBS

Figure 94

Cargo handling, storage and other supporting transport services: value added per person employed by company size, 2005 (€ thousand)
160.0

140.0

120.0

100.0

80.0

60.0

40.0

20.0

0.0 2-49 empl 50-249 empl 250 or more

RO 11.8 11.3 8.2

LI 12.7 15.5 32.2

SK 12.2 18.8 29.6

PL 14.9 20.8 25.0

HU 23.3 33.9 30.8

IT 41.1 32.3 63.4

SE 51.4 57.2 55.9

FI 62.9 59.8 55.0

ES 39.7 58.2 77.2

FR 50.7 46.6 76.5

DE 60.2 53.2 79.4

BE 96.6 73.1 76.9

NL 76.0 63.9 103.2

DK 124.1 84.6 65.5

IE 151.4 71.6 79.2

EU* 48.8 45.3 67.0

Source: Eurostat SBS

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7 Computer-related services

7.1

Sector overview
This chapter will focus on computer and computer-related services and activities. From a statistical perspective, the NACE classification of computer-related services (CRS) consists of the following categories of activities: • Hardware consultancy; • Software consultancy and supply (including software publishing); • Data processing; • Database activities; • Maintenance and repair of office, accounting and computing machinery; • Other computer related activities. From a broader perspective, these activities form part of the wider ICT sector121, which has become a sector of prime importance in the economy. Although the focus will be on computer related services, it is sometimes difficult to make a distinction between these services and other ICT related services and, as many ICT companies produce both goods and services, between supply of ‘products’ and supply of ‘services’. As noted in the EU Competitiveness Report 2006122, there are in addition, increasing complex relationships between the different market segments. There is a clear digital convergence of technologies in computing, communications, content and consumer electronics, which allows for example for the bundling of internet access, telephony and entertainment content. The ICT sector is a relatively young and dynamic sector that is characterised by higher than average growth rates and research intensity. The sector has received quite some attention from EU policy makers, in particular because it is seen as a strategic sector for meeting the EU’s Lisbon Strategy for growth and employment. One of the main reasons for this attention is that the sector is seen to have important spill-over effects on other sectors of the economy, particularly in terms of promoting increased productivity in these other sectors.

121

122

The concept of ICT can have several meanings: ICT is being referred to as a product, a technology or a sector. In this chapter we look at ICT as a sector. We only focus on that part of the sector that relates to ICT services, as opposed to ICT hardware. European Commission (2006) European Competitiveness Report, Competitiveness and Economic Reforms, Communication from the Commission COM(2006) 697 final, Commission Staff Working Document SEC(2006) 1467/2,ISBN 92-79-02578-3

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According to a recent Commission staff working document on ICT services123, the EU has traditionally had a comparative advantage in electronic communication services, but this sector has recently faced a slowdown on the EU market. Consequently, software and IT services (accounting for 31 percent of the EU’s ICT sector in 2006) is now the new dynamic growth area. Within this sub-sector, the EU ICT Task Force report124 identifies enterprise software, embedded and distributed software, hard real-time design and dependable/fault-tolerant systems; software engineering; and high-end computing and GRID architectures as key European strengths. 7.1.1 Statistical overview (Computer and related activities) Figure 95 to Figure 97 present Eurostat data on, respectively, the number of companies, turnover and employment of the sector, and the turnover growth rate, the number of companies in the sector. These data indicate that in 2005 the sector in Europe comprised of some 520 thousand companies, with a turnover of €340 billion and employed 2.6 million persons. To a large extent, the relative size of the sector in terms of turnover and employment numbers corresponds to the relative economic importance of countries, although the UK is prominent in having the largest number of companies and highest turnover and employment in the sector. As an indication of the weight of the sector in the economy, the sector accounted for approximately 1.7% of total turnover, and 2.2% of total employment in the non-financial and non-utility business economy (NFNUBE)125 of the EU in 2005 (see Figure 98 and Figure 99). These data illustrate the importance of the sector for the Baltic States of Estonia and Latvia (and to a lesser extent Lithuania) and also Austria and Germany. The firm structure of the sector is characterised by a prevalence of small companies; Eurostat data indicate that over 90% of companies in the sector have less than 10 employees (see Figure 100). These small companies, however, typically account for a relatively small proportion of total turnover and employment, with the data indicate that firms with 250 or more employees account for over 30% of total employment (Figure 101) and close to 45% of total turnover (Figure 102), while firms with between 50-249 employees account roughly for a further 20% of both employment and turnover.

123

124

125

Source: Commission Staff Working Document, accompanying document to the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the region, i2010Annual Information Society Report 2007 [COM (2007) 146 final}, 30 March 2007. Source: EU ICT Task Force (2006) Fostering the competitiveness of Europe’s ICT industry, EU ICT Task Force Report, November 2006. Defined as NACE Sections C, D, F to I and K. More normally the non-financial business economy (NACE Sections C to I and K) is utilised as a reference, but as data on the ‘utilities sector’ (NACE Section E) is missing for some countries the definition ‘non-financial and non-utility business economy’ has been used.

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7.2
7.2.1

Competitiveness analysis
Labour supply, costs and conditions Computer and related services are a relatively labour-intensive sector. Accordingly, wage costs, labour taxes and social security payments are important drivers of costs in the sector; which implies that costs are a priori higher in countries with higher wages and tax systems. Due to labour shortages in the sector, there is a tendency for further upward pressure on wage costs. In fact, the lack of suitably qualified and experienced workers poses serious constraint for the sector. This lack in the supply is mainly due to the fact that the sector has been expanding at a faster rate than the number of graduated people in relevant studies, and to the fact that the sector is relatively young, which causes a general lack of experienced people. This has led to employment in the sector of people with other educational backgrounds and more focus on internal education and training, especially in larger companies. In addition, labour shortages have induced outsourcing and off-shoring in the sector.

7.2.2

Apparent labour productivity Eurostat data indicate that personnel costs represent around 38 percent of total production value on average in the sector of computer and related services for the EU as a whole, but with significant differences across countries (see Figure 103). It is not possible, however, to analyse in detail the breakdown of other production costs and it may be that variation across countries (and the apparently low overall share of labour in total costs) reflect differences in the importance of the various sub-sectors and, for example, associated costs of hardware (e.g. included in the sub-sector hardware consultancy). The average turnover per person employed in the sector in Europe was around € 125 thousand in 2005 (see Figure 104) and the value-added per person employed amounted to € 63 thousand (see Figure 105), although with large differences across EU Member States. Adjusting apparent labour productivity for wage differences (see Figure 106)126 highlights the relatively high productivity in several of the new Member States (Romania, Latvia, Lithuania, Bulgaria) and the United Kingdom. Other than for these countries, there appears to be relatively limited divergence in apparent wage adjusted productivity across most of the other countries for which data are reported. One feature of the productivity performance of the sector that seems to be important is the role of company size. As shown in Figure 107 and Figure 108, for most countries the level of turnover and value-added per employee is positively related to the size of the company; though, among the larger EU economies, this relationship is less clear for Belgium and Finland.

126

Apparent labour productivity is estimated by the ratio (%) of value-added per employed person to average personnel costs per employee.

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7.2.3

Productivity enhancement Continuous innovations in ICT equipment (hardware) implies that the computer and related services sector is itself faced by ongoing pressures to innovate to adjust to the new environment. At the same time, innovations in ICT equipment make a positive contribution to the productivity of ICT services providers; for example, through enabling greater speed and/or volumes of information to be processed, or through enhancing the efficiency of organisation of service processes. At the same time, the computer and related services sector also plays an important role in their own productivity enhancement, especially in developing software applications which enable, for example, more efficient or user-friendly database programmes, or that allow for bundling of different ICT products (TV on your mobile telephone). Of course innovations in ICT do not only contribute to productivity enhancement in the sector itself, but more importantly, they also account for productivity gains in the rest of the economy. The ICT sector as a whole is said to account for about 40 to 50 percent of all productivity gains in the EU, while it is frequently argued that differences in productivity growth between the EU and US are largely explained by the relatively lower use and integration of ICTs in all sectors of the EU economy. Although technology seems to be the most important driver for productivity gains in the sector, there is also attention for organisational aspects, especially among the larger companies. A main element in this is the increasing trend of outsourcing of ICT services to lower wage countries like India, most notably in software development, data processing and database activities. This is partly motivated by costs reasons, but also driven by the shortage of appropriate labour skills in the EU. Other organisational aspects include increased attention for better project management in the sector and the recruitment of appropriate staff.

7.2.4

Demand side conditions The ICT market has been growing at a relatively rapid rate over the last years, and within the ICT sector, IT software and services have expanded most rapidly127. The sector is vulnerable for economic shocks, however, as clients may reduce or postpone some of the ICT services investments, like the purchase of new software programmes. The growth of spending on ICT generally fluctuates more strongly than the economy, and is more in line with growth in investment. Demand for CRS originates from nearly all other sectors of the economy and both the private sector and public sector are important clients. Many SMEs use external consultants for the major part of their IT-related work, such as the design, implementation and maintenance of computer networks and software in their organisation. Governments and large companies often have their own IT department and use external providers mainly for specialist advice or products. There is a clear trend towards outsourcing of CRS also in large companies, however, and (albeit to a lesser extent) in governments.

127

Source: ICT Office (2008) ICT Marktmonitor 2008, Woerden.

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Regarding the type of services demanded, it can again be noted that the distinction between the different parts of the ICT sector is increasingly blurred. There are for example requests for the complete design of work places, which includes advice on the hardware to be bought, purchase and installation of the hardware, installation of software, and sometimes also the maintenance of the systems. Telecom solutions might also be included. One area of concern for European policymakers is that, compared to the USA, the uptake of ICT by other sectors in the EU is relatively low. This lack of ICT investment by business can partly be explained by a lack of knowledge: there is not enough expertise, especially in SMEs, to value the possible contribution ICT can make to the productivity of the company, or to choose the appropriate technology or software solution. In addition, the lack of flexibility for companies is sometimes cited as a reason: employment legislation that makes it difficult or costly to fire staff makes ICT investments less attractive. Also among individuals there is a lack of demand for ICT products and services. This is mainly due to a lack of basic computer skills and digital literacy, especially among the older part of the population. Improved computer and knowledge skills of the population as a whole are therefore likely to contribute to increased use of ICT services. A recent CapGemini survey128 found that for companies to innovate, it is important that IT services (whether internally or externally provided) have a clear view of the business processes in the company. In combination with knowledge of technology trends and the IT market, IT service providers can help think of alternative solution to increase efficiency or effectiveness of the company’s operations. Increased attention for the role of ICT (especially the service providers) as a partner to business rather than just supporting business could therefore also help to increase the uptake of ICT in the economy. Public sector role Given the size of their investments in IT, governments – and the public sector more broadly - play an important role in shaping demand in the CRS sector; for example, through their procurement policies, governments may often express a preference of one software model over the other. One illustration of government influence on shaping demand is the considerable debate over whether or not governments should adopt open source software models rather than closed source software models. The decisions that governments make in this respect may impact on the software choices of organisations working with the public sector, thereby having an important effect on competition as well as innovation in the sector. Given this potential to influence the market, it is argued that it important that government procurement decisions should support the creation and maintenance of a level playing field in the market, implying that they should focus on the functionality requirements and maintain technological neutrality. Being a major client of the sector, the public sector can play an important role in further developing the CRS sector. An often cited example is the further development of eGovernment. This would not only give a boost to computer services (notably software), but also have an important impact for the economy as a whole by reducing administrative
128

Source: Capgemini Consulting (2008) Global CIO Survey 2008- The role of the IT function in Business Innovation.

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burden for business and services. There are currently various initiatives to further develop e-Government within the EU. Another issue related to public procurement policy concerns access of SMEs to public sector markets for CRS, and ICT projects more generally. Partly because of the size of many government projects is too large for SMEs to enter into competition with larger companies, the role of SMEs in government procurement is relatively limited. In addition, administrative requirements and slow decision and payment procedures often limit the possibilities for SMEs in government procurement. 7.2.5 Competition and business strategies The CRS sector is much less concentrated than the other segments of the overall ICT sector; in ICT hardware and telecommunication the degree of market concentration is much higher. SMEs account for some 60 percent of the value added in the CRS and 90 percent of all micro firms in the ICT sector are employed in this market segment129. Within the IT sector, the market structure can change rapidly as a result of the technological developments or of economic trends. Digital convergence, for example, has given rise to mergers and acquisition between different ICT companies; e.g. telecom companies merging with software companies or with media companies. Also, when the sector is expanding, there is often a clear trend of people leaving larger companies to start a business of their own, while in a declining economy, the reverse may be true. Mergers and acquisitions also play an important role in the sector, with companies buying up other companies to reach economies of scale, or to internalise certain specific technological knowledge while selling off other non-core or less profitable activities. Within the CRS sector, packaged software is the market segment where economies of scale are of most importance and with the highest level of market concentration; large players operating globally (e.g. Microsoft, Oracle and SAP) are active in this segment. There is a clear trend towards consolidation through mergers and acquisitions in this segment, although at the same time new start-up companies are continuously entering the market with new innovations. In other segments of the sector, notably the provision of hands on ICT support to companies (e.g. network design, maintenance), competition is less fierce and mostly at a national or even regional level due to the fact that proximity between service providers and clients often remains very important. Margins in the sector depend on the market segment. In general, for more standardised services price competition is fierce and margins are relatively low, while higher margins are possible as products and services become more customised and innovative. In segments where competition is fierce, there is more emphasis on cost reductions, for example through outsourcing. By contrast, price competition in ICT support to SMEs seems limited, and as long as computer service providers perform in line with the requirements, trust becomes more important than price. SME clients usually arrive through informal channels, or they are referred to the companies by major software producers for which the SMEs are certified (see Section 7.3.1).
129

Source: European Competitiveness report 2006.

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Evidence of market segmentation by size is reflected in the fact that larger companies tend to focus more on larger clients and larger and more complex projects, as well as on accessing broader markets (i.e. markets of other Member States), especially in the software segment. By contrast, SMEs in the sector are generally seen as the main drivers in innovation in new technologies and especially software applications and they are also good in finding and exploiting niche markets. In addition to these innovative SMEs, there is also a large group of SMEs offering ‘basic’ computer and related services. At the same time, cooperation between companies in the sector is important and for larger projects companies will often team up to make a stronger bid; for example, larger companies will form partnerships with (and/or buying) smaller specialised or innovative firms. This also allows smaller companies working in a specific niche to work for bigger clients. Co-operation is also necessary to deal with the problem of labour shortages and many larger companies build networks with small companies or self-employed people, in order to be able to respond to increases in demand for products or specific skills requirements. For CRS in general, and notably for software, an important trend is the shifting focus from product innovation alone to increasing attention for the ability to market and sell products. In other words, more emphasis is put on anticipating and meeting customer needs rather than on just building, maintaining and servicing products130. Another example of recent technological developments in the software market is the increased use of Software as a Service (SaaS), which means that an application is hosted as a service that is provided to customers across the internet. By eliminating the need to install and run the application on the customer's own computer, SaaS alleviates the customer's burden of software maintenance, ongoing operation, and support. For the SaaS provider, benefits arise from a continuous revenue stream and better protection of its intellectual property rights. This relatively new mode is likely to affect the competition and market structure of the sector, although at this stage its impact is still hard to assess. 7.2.6 Internationalisation Market for computer and related services are still largely defined along national or even local lines (with packaged software being the exception). Most clients work with national (or even local) computer service firms, although some (especially multinational) firms may also deal with service providers from abroad directly. There are a number of large, internationally operating companies (e.g. IBM, Cap Gemini), but these companies usually establish offices in other countries, as local knowledge and proximity to the client are important in the sector. Nevertheless, there is increasing attention for off-shoring part of the services offered, mostly the more standardised services or services that require little interaction with the client. Although this is especially important for larger companies, it is clear that SMEs are also looking at the possibilities for off-shoring at least part of their services. More knowledge intensive services and service that require interaction with the client are usually performed in-house.

130

See G. Brooks (2006) Software development: a core competency? SDTimes on the web, 1 April 2006.

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The extent of off-shoring in the EU seems to depend on geographical, cultural and historical factors. For example, lower language and cultural barriers to off-shoring can explain the UK’s and Ireland’s significantly higher allocation of IT budget to off-shoring delivery, primarily to India. In France, more than 60% of companies have “a policy or tradition against offshore outsourcing” and the use of off-shoring is, as a consequence, low.131 In addition, while global companies put more emphasis on using more offshore and electronic delivery, smaller companies operating regionally tend to focus more on near-shoring (i.e. off-shoring to nearby locations). The position of the EU in trade in ICT services is relatively strong, although data on this trade are limited. According to the European Competitiveness Report 2006132, evidence suggests that EU has a comparative advantage in ICT services. Total EU shares of OECD exports amounted to 70% of communication services and 80% of computer and information services, with Ireland, the UK and Belgium being the main exporters of computer services. ICT services (i.e. including communications) show a trade surplus. The larger availability of high-skilled labour in the Eastern European EU countries who work at relatively low wages has increased the international competitiveness of EU computer service providers.

7.3

Screening of regulatory and other framework conditions
The purpose of this sector is to identify and prioritise the key issues facing Computer and related services sector both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). The analysis is based around a screening of the sector in relation to the main regulatory and framework conditions133; the overall assessment is summarised in Table 19.

7.3.1

Regulatory conditions and standards EU standards and regulations There is no common framework of standards and regulations in the EU, nearly all standards and regulations for the ICT sector are formulated at a national level. The EU has acknowledged this problem and has taken several initiatives in recent years to improve the situation134. In 2005, the EC launched the initiative “i2010- A European Information Society for growth and employment”, which aims to boost efficiency throughout the economy trough wider use of ICTs. It is based on three pillars: • Creating the single European Information Space, which promotes an open and competitive internal market for information society and media services; • Increasing investment in innovation and research in ICT; • Fostering inclusion, better public services and quality of life through the use of ICT;

131 132 133

134

Source: CapGemini Consulting (2006) European CIO Survey, views on future IT delivery 2006. Ibid, footnote 122. This analysis is in accordance with the general framework for assessment of regulatory and framework conditions agreed as part of the Framework Contract of Sectoral Competitiveness Studies. Source: EU ICT Task Force (2006) Fostering he competitiveness of Europe’s ICT industry, EU ICT Task Force report, November 2006.

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To achieve those aims there are various actions such as regulation, funding for research and pilot projects, promotion activities and partnerships with stakeholders135. In 2006, the EC created and ICT Task Force in order to: Identify major obstacles to the ICT sector’s competitiveness and the uptake of ICTs; • Help mobilize the sector and draw the attention of Member States to the obstacles identified; • Recommend possible policy options. This taskforce consists of representatives from industry, trade unions, SMEs, Chambers of Commerce, consumers, investors and academia136.

A major policy issue for the sector is security. Security is essential for the development of the sector as it affects trust of customer in ICT products. Other issues include privacy and spam. There are several initiatives at the EU to commonly discuss solutions to these problems (like the EC’s Communication ‘towards a general policy on the fight against cyber crime’ published in May 2007 and the above mentioned i2010 initiative), but so far most rules and regulations affecting the sector are formulated at Member State level. There are also a large number of directives at EU level that directly of indirectly affect the sector. Some examples include, Directive 2006/24/EC on the retention of data, Directive 2000/31/EC on electronic commerce, Directive 1999/93/EC on electronic signatures, Directive 2001/029/EC copyright and related rights in the information society, Directive 2002/58/EC on privacy and electronic communications, Directive 2007/64/EC on payments services in the internal market, etc137. It goes beyond the scope of this study to analyse how all these and other directives affect the sector. What can be said, however, is that this plethora of different directives gives rise to confusion both among companies in the sector and their clients, especially because they are sometimes implemented in different ways in the various EU member states. In addition, an important question is how quickly regulation can be developed in light of the high speed of change in the sector. Client sector standards and regulations Client sector standards and regulations are mostly reflected in the functionality requirements and specifications that are laid down in contracts with the service providers, and seem to have little impact on the computer and related services sector itself. Only the standards set by governments in their contracts are sometimes said to influence standards in the markets, although research on the importance of this issue is lacking. Sector-level standards and regulations The sector standards can be divided in two types: technical standards, and quality standards. With respect to technical standards, there are quite a number of technical standards that affect the sector. This may involve standards related to specific technologies (e.g. GSM, UMTS, WiFi, Bluetooth), or related to specific issues (e.g.

135 136 137

For more information, see: http://ec.europa.eu/information_society/eeurope/i2010/index_en.htm http://ec.europa.eu/enterprise/ict/policy/taskforce/taskforce_en.htm Sources: Anderson, R., Boehme, R., Clayton, R. and Moore, T. (2008) Security Economics and the internal market, commissioned by European Network and Information Security Agency; and the EC 2007 ICT standardisation work programme.

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security, interoperability)138. The latter often concern voluntary standards, which are sometimes obligatory for government organisations. These standards are largely determined at national levels, although there is also co-operation at EU level (e.g. through sector associations) or even global level to prevent divergence. Some standards are developed in co-operation between companies in the sector, governments, and other relevant stakeholders139. International organisations like ISO have also defined technical standards for the sector. There is increasing attention for quality standards, partly as a result of the relatively high number of software project failures. Reports of the Standish Group show that in 1994 only 16 percent of all software projects were regarded as successful (i.e. meeting business objectives and within budget and schedule), while 31 percent of the projects failed. Since then, there have been improvements in the sector, with the figures in 2006 indicating a failure rate of 19 percent and a success rate of 35 percent140. Despite the considerable improvement in success rates, the figures also show that there is still much room for improvement of performance. Big ICT suppliers work with certificates from major IT companies that function as a quality label. Examples include certificates of SAP, the Microsoft Gold Certified Partnership and a certificate for being HP Preferred partner. Getting such a certificate usually requires employees attending trainings and earning points that way. For large companies it is common to have such certificates, while for smaller companies it may be quite costly. On the other hand, having such a certificate makes it significantly easier to get services from the certificate providers and these providers also direct customers to the ICT companies which have their certificate. As these certificates also function as a quality label, they also help to attract new clients indirectly. There are a number of other quality standards that are being used, for example the general quality standard ISO 9001 for organisations, or, at project level, Prince 2, which is a method for effective project management, originally designed for the ICT sector, but now also applied in other sectors. ISO 9126 is an international standard for the evaluation of software quality. Because of the increased attention for software quality and project management quality, there are currently various initiatives at national and international level to develop new or improved standards for the quality of services and related project management. 7.3.2 ‘Other’ framework conditions Knowledge and innovation Knowledge and innovation are of prime importance in the IT sector, given the fast technological developments and need to adjust accordingly in order to stay competitive.
138

139

140

An example of this include ODF which will become obligatory for the Dutch government. ODF stands for Open Document Format, which means that the software used in the government must be able to read all office documents, from different versions. (see http://www.iso.org/iso/iso_catalogue/catalogue_tc/catalogue_detail.htm?csnumber=43485 for more information). An example of this is the standard eXtensible Business Reporting Language (XBRL), which was developed by an international non-profit consortium of approximately 450 major companies, organisations and government agencies. Source: Software Development Times, Standish Group Report: There’s Less Development Chaos Today, 1 March 2007.

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R&D is therefore an important issue in CRS sector. According to the EU Competitiveness Report 2006, Europe spends much less on R&D in the ICT sector the US and Japan. A specific characteristic of the EU’s ICT sector is that R&D investments are strongly concentrated in larger firms, while SMEs spends relatively much less. At the same time, in comparison with their non-EU counterparts, those EU companies that invest in R&D tend to invest more. This gives EU firms a competitive advantage in activities with high R&D sunk costs. On the other hand, there seems to be a need to stimulate R&D activities among smaller firms; for example, by increasing access to finance (venture capital) or increasing their access to publicly funded research programmes. Intellectual property rights (IPRs) are an important issue for the sector. There is some controversy over the use of IPRs in the sector, and both academic literature141 and the EU’s ICT task force are not univocal about the benefits and costs of IPRs. IPRs seem to stimulate innovation of large players, while on the other hand reducing market entry by new players and also reducing the ability of other companies to use the new knowledge or technology to further improve or develop their products and services. When IPRs are used, it is important to keep the associated costs of patents low. There are a number of initiatives underway in the EU to achieve this142. An important issue in the sector concerning knowledge and innovation is the use of open source software for computer and related services. There is increasing attention for the use and benefits of open source software, especially after the success of initiatives like LINUX. Open Source Software is open to everyone (as opposed to proprietary software); people are free to use, copy and modify it, and to redistribute modified versions of it. Ghosh (2006) indicates that two-thirds of this software is written by individuals, while firms contribute about 15 percent and other institutions around 20 percent.143 As much of the OSS development is done by individuals who are not directly paid for it, Ghosh estimates that this saves the industry over 36 percent in software R&D investment. Market penetration is increasing, and the EU is the leading region in terms of globally collaborating software developers. Although the US has the edge in terms of large businesses making use of OSS, the greater individual contribution from the EU has led to an increasing number of globally successful European SMEs in OSS. Given the relatively good performance of the EU in this market segment and the effects of the segment on the ICT sector as a whole in terms of innovation and competitiveness, it is important to take this into account when designing or implementing policies, for example in public procurement of software, public R&D funding or tax treatment (while at the same time level playing field considerations (technological neutrality) need to be taken into account).

141

142

143

See for example Cockburn, I. and MacGarvie, M. (2006) Entry, exit and patenting in the software industry, NBER working paper 12563. For example, the London Agreement that entered into force in May 2008, and which reduces translation costs for European patents. Gohosh, R. A. (2006) Study on the Economic Impact of Open Source Software on innovation and the competitiveness of the Information and Communication Technologies (ICT) sector in the EU, MERIT, report prepared for the European Commission, November 2006.

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Labour force and skills ICT skills among the EU workforce are very important for the development and uptake of ICT in the economy. There is a clear shortage of ICT workers, however, and the number of students in IT-related education has decreased over the last years. At the end of the last century, demand for ICT staff was booming but this came to an end in 2001 with the dot.com bubble burst. Demand has been increasing again since 2003, but it is clear that there are skills shortages in specific segments of the labour market especially for people with longer experience. Many of the big companies are employing young people with little ICT education and experience to provide the necessary education themselves. Some have also established relationships with educational institutions. An example if the co-operation between Intel’s Philanthropic Education Group with UC Berkeley’s Haas Business School of Entrepreneurship in developing the worldwide programme and curricula for “Technology Entrepreneurship- Theory to practice”. Over 300 professors in Europe have been trained to teach this course144. Companies see benefits of such programmes in having both better educated employees as well as clients/consumers. For SMEs, similar initiatives are much more difficult due to financial constraints and, furthermore, a relatively high staff turnover rate in the sector is also a factor that discourages investment in employee training. Next to training at the start of a career, continuous training of employees is an important issue for all companies in the sector. With the high rate of innovation and technology development associated with the sector, companies need to be aware of the latest developments in order to remain competitive. In addition, the increased attention to marketing, sales and project management competencies require more attention to be given to entrepreneurial skills among the IT work force. The gender balance is also an issue in the sector. According to an OECD report145 women have low shares of ICT-specialist employment, and these shares seem to be remaining constant or even declining. In 2004, the share of women in computer and related activities in the EU was less than 25 percent. Also in education, women tend to be relatively underrepresented in computer sciences. Increasing the participation rate of women both in computer studies and in the sector may thus be another way to reduce labour shortages for the sector. EU expansion has made it easier to either relocate parts of production to Eastern Europe or to use migrants from this region, which are generally well educated and work for relatively low wages. This also partly contributes to reducing labour shortages in the sector. In addition, off-shoring of activities to non-EU countries provides an option to address labour shortages.

144

145

Source: Council of European Professional Informatics Societies (2006) Thinking ahead on e-skills for the ICT industry in Europe, Harnessing our strengths and diversity for the World Stage, December 2006. Source: OECD Working Party on the Information Economy (2007) ICTs and gender, DSTI/ICCP/IE(2006)9/final.

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Market access Market access is an issue in the sector; there are several barriers that limit trade between countries. Although most countries made commitments under the General Agreement of Trade in Services (GATS) under the WTO for Computer and related services, according to the World Information Technology and Services Alliance (WITSA) there are a number of key countries that made either no commitments or only partial commitments, although WITSA does not specify these countries146. WITSA notes in addition that since the concluding of the Uruguay Round in 1995, a lot of technological developments have taken place, but stresses that existing commitments should also be applied on goods and services that can now be delivered electronically. Furthermore, it stresses that the relative liberal trade regime for software should not be jeopardised because the means of delivery has changed from a physical medium to electronically delivered software. Liberalisation of trade and market access in other sectors is also important for computer and related services. This is the case for example for telecommunications and electronics, but also for services that are important for e-commerce transactions, like advertising services and online payment services. In addition, there are the “horizontal rules” that play a role in the sector. Government procurement is an issue as in many countries where access of competitors from abroad to public contracts is still limited. In addition, intellectual property rights constitute an important non-tariff barrier for the sector, as the rules and regulations of IPRs differ between countries, leading to significant costs for companies willing to trade. Certain national regulations can also play a role in market access. For example, the EU Data Protection Directive (1995/46) can be burdensome for companies from abroad that rely on data exchange, as this directive allows the transmission of EU data to third countries only if those countries are deemed by the European Commission to provide an adequate level of protection by reason of their domestic law or of the international commitments they have. Structural change Over the last decade, there has been a significant increase in off-shoring activities in the sector. The outsourcing started as a result of s shortage of labour in the EU, and because of cost reasons, especially since the decline of the sector in 2001. Next to these demand aspects, more general trends like decreasing costs and increased ease of communication, improved ICT infrastructure in third countries and increased openness to FDI have also contributed to outsourcing of IT services. The extent of outsourcing varies widely within the EU, with the UK outsourcing a relatively large proportion of its services and, for example, Italy a relatively low proportion147. Differences in labour regulations and other administrative procedures (e.g. time to get a work permit) seem to contribute to these differences, next to cultural and language differences (see Section 7.2.6). There are no reliable statistical data for outsourcing in the sector, however.

146 147

Source: WITSA (200%) WITSA Statement on the upcoming Hong Kong Ministerial, October 2005. Source: Engmann, M. (2005) International sourcing of IT and business process services: experience from the United States, Europe and India, paper prepared for the WTO symposium on cross border supply of services, 28-29 April 2005.

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The outsourcing trend can contribute to the competitiveness of the sector in the EU, by increasing efficiency and reducing costs. Given the labour shortage in the sector, it does not seem to contribute to unemployment in the sector. Some countries in the EU have benefited from in-shoring, notably from US companies. Following EU enlargement, companies in Eastern Europe have also experienced increased trade and investment in the IT sector. The EU is especially attractive for the more knowledge-intensive computer and related services. Competition issues As indicated earlier, competition in the computer and related services market is mainly national and not international. Nevertheless, at global level there are a number of players that have acquired large economies of scale and experience in operating globally that implies that it is difficult to compete with these players. Microsoft is a well-known example in relation to competition issues (active in the packaged software segment). At national level, there is also increased concentration, as especially larger players are active in mergers and acquisitions. In Section 7.1 it was already shown that a relatively small number of larger firms within the sector account for a substantial proportion of total turnover and employment but, in itself this provides no evidence of potential competition problems. The large number of SMEs in the sector seems to point to limited entry barriers. Most services require limited starting capital. Other forms of market segmentation may also be present in which competition may be an issue, for example on a geographical basis or for particular services, but it is beyond this study to evaluate whether these give rise to any possible concerns. The current trend in the sector towards integration of vertical chains (e.g. hardware producers offering also services) and the emergence of new horizontal markets as a result of the digital convergence, as well as the fast developments in the market as a result of technological change more generally pose a challenge for regulation of competition in the sector. 7.3.3 Exogenous conditions and trends Technological change Technological change is important for the sector. CRS seem to be mostly affected by developments in the wider ICT market, while at the same time the sector is contributing itself to technological change in the sector; e.g. in the case of the digital convergence mentioned earlier. The ICT sector as a whole is a main driver of technological change and innovation for the other parts of the economy. Computer and related services play a particularly important role as they can act as an intermediary between technology and clients: depending on the needs of the clients, the services sector helps to find appropriate technological solutions (either in selecting, installing and maintaining hardware, developing software, etc. ). In this way the sector plays a role in increasing ICT uptake within the economy. Social and demographic change Demographic change and the ageing population may pose problems for the CRS sector in terms of availability of skilled workers and, as mentioned earlier, the lack of workers with

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relevant IT skills has already been raised as an issue for the sector. Increased (temporary) migration will partly help to resolve this problem and EU enlargement and integration has facilitated the use of migrants from within the EU. There have also been various initiatives to facilitate to temporary migration of high-skilled people from other countries; for example shortened or simplified entry and working permit procedures (e.g. the current EU proposals for an EU Blue Card). Global competition As indicated in Section 7.2.6, markets for computer services are mainly national or even local. Nevertheless, there are a number of strong players that operate globally, like SAP, Microsoft, IBM, etc. This is especially true for packaged software. US companies dominate the world market, but also EU companies are able to compete internationally. The larger international companies are able to benefit from economies of scale and have also built up a lot of knowledge of operating in the global market. Combined with considerable mergers and acquisitions in the sector, these factors have contributed to increasing concentration in the sector. As a result, it is difficult for other companies to acquire a similar position on the world market. Despite this trend towards consolidation in the sector, global competition has been increasing over the last decades. Especially for the more standardised services, India, China, the Philippines, Ukraine, Russia and also Eastern Europe have become more important.

7.4

Overview of potential policy issues
The purpose of this section is to identify and prioritise potential areas for European policy initiatives both in terms of the sectors own development, and in terms of interactions between the sector and its clients, specifically those in industry (manufacturing). To begin with, the possible arguments (justification) for possible policy intervention from an from an economic standpoint are examined. After this, the analysis is based around a screening of the sector in relation to existing industrial policy initiatives and some specific themes relevant to the business services sector; the overall assessment is summarised in Table 19.

7.4.1

Key arguments for policy intervention Social externalities ICT solutions are able to contribute to respond to some of the EU’s social challenges (e.g. in the field of health care or environment). In this sense, it is commonly felt that ICT can contribute to the general quality of life of citizens. In addition, given the effect the sector (although including ICT manufacturing and communications) has on the productivity of the economy as a whole (see Section 7.2.3), the sector has a very important and still increasing role in today’s society. At the same time, increased reliance of ICT systems and CRS means that temporary breakdowns of ICT equipment or software are for many companies now almost equally costly as power failures. CRS services also play an important role in knowledge diffusion in society, notably with the developments related to Internet. The Internet also has an increasingly social aspect, for example with the various social networking sites. Services in the wider economy may also improve due to the interaction and feedback made possible by Internet; for example,

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related to content (e.g. Wikipedia) or reputation and feedback on products or services (e.g. Tripadvisor). Security of ICT is an important topic in the sector that affects the society at large. The direct cost to Europe of protective measures and electronic fraud is estimated to be billions of Euros; and growing public concerns about information security hinder the development of both markets and public services, giving rise to even greater indirect costs148. Market power and competition Issues of market power and competition revolve around the existence and abuse of market power (e.g. entry barriers, monopolistic competition, etc.). As noted under Section 7.2.5, there is no prima facie evidence that this is a problem for the computer and related services sector. At the same time there are well reported examples of possible competition problems due to the dominant position of some leading CRS companies (e.g. Microsoft case). Information asymmetries Information asymmetries arise when buyers and sellers are not well informed of the services to be provided, or where information is not equally distributed between them. In the context of CRS, buyer-side lack of information can relate to the performance of the service provider since this cannot be ascertained in advance. As there are no commonly used quality standards in the sector, reputation of service providers can therefore be important. With respect to the importance of asymmetry of information and quality of the services, there is a difference between large and small clients: as the projects for smaller clients are usually less complex and of shorter duration, the risk of project failures is much smaller, and as a result, less attention is paid to the selection of the best service provider. As noted in Section 7.3.1 attention for quality standards in the sector is increasing. Better (independent) information and systems to evaluate the ‘quality’ of contractors, particularly during selection procedures but also an evaluation system for services actually provided would help to reduce the problem of information asymmetry. Although a quality standard would still not provide a full guarantee for successful projects/contracts, as much depends on individuals and also on the interaction of a project manager with the client, it will increase the likelihood of successful projects. 7.4.2 Screening against policy initiatives Table 20 provides an initial screening of the computer and related services sector against existing and potential EU horizontal ‘industrial’ policy initiatives149, and a number of additional possible services related initiatives. This attempts to identify those policy initiatives that, if introduced or extended, could be of most relevance for the industrial cleaning sector, in particular in terms of raising performance (e.g. productivity improvements) and/or creating opportunities for sector development.
148 149

Source: see footnote 17. Based on the Mid-term Review of Industrial Policy, COM(2007) 374.

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Table 19

ICT and computer related services: screening of framework conditions Regulatory & ‘other’ framework conditions Heading Item Issues Relevance Sectorlevel Industryservice interactions National regulatory measures EU regulatory measures Regulatory conditions Completion of internal market legislation Industry and professional regulations and standards Knowledge: R&D, innovation and product/service development
High shortage of IT skilled and experienced Innovation important in the sector Increased use of open source software Different views on importance of IPRs Increasing attention for quality standards Plethora of directives that affect the sector Initiatives towards common rules and standards at EU level in the sector. Not seen as an issue for the sector Divergence in national regulations

-

-

Labour force, knowledge and skills

labour Continuous training and more attention for project management

‘Other’ framework conditions Market access (trade and investment)

Sector is relatively open to foreign competition Government procurement not always open to foreign competition Differences in IPR regimes cause NTBs Changes in modes of delivery may affect commitments made

Structural change

Trend towards outsourcing and off-shoring Competition mainly national or even regional

Competition policy issues

Increased concentration at national level, but limited entry barriers Rapid changes in market structure and competition due to technological developments

Technological change Social and Exogenous conditions demographic change

Sector itself is major driver of technological change Decreasing labour force Increased migration Ageing of the population Limited number of players dominate global

Global competition

market More international competition for standardised services.

-

No or limited relevance Relevant Important Very important

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Table 20

ICT and computer related services: screening of policy initiatives EU policy areas Heading Initiatives Trade policy Trade Proper functioning of the internal market Sector issues
Differences in IPR regimes cause NTBs Mode of delivery should not affect existing commitments Lack of common sector standards and regulations within the EU

Relevance

More access to government procurement in third

Public procurement

countries More access to public procurement for SMEs Technological neutrality

Better regulation

Competition policy Better regulation and simplification Technical standards Other standards Health and safety Research and development Intellectual property rights

Fast developments in sector affect competition Harmonisation of national standards and regulations Development of common industry standards and codes of practice etc Development of common industry wide standards Increasing attention quality standards

Innovation important for sector Mainly in larger companies Ambiguous effect on innovation Costs of patents should be limited Better promotion of computer services as a partner

Knowledge and skills

Innovation policy

rather than support function in business to stimulate innovation Enlarging of the IT educated workforce

Employment, qualifications, skills / Flexicurity

Facilitation of immigration of high-skilled labour Attention to entrepreneurial skills and life-long learning

Access to finance / risk capital Energy and Waste, water, air

For SMEs access to finance an issue in relation to R&D ICT solutions for environmental efficiency.

environment Intensive energy use Structural Change Anticipation Tertiarisation Organisational and services innovation Support for knowledge Services intensive business services Measurement and recognition of intangible assets Regional actions (demand and supply matching) No or limited relevance Relevant Important Very important
More attention for project management, marketing and sales

-

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Figure 95

Computer services and related activities: number of companies by country, 2005 (Eurostat estimates)
120,000

100,000

80,000

60,000

40,000

20,000

0

UK

IT

FR

DE

SE

ES

PL

HU

NL

PT

AT

BE

RO

NO

DK 7,488

GR 5,799

FI 4,620

BG 2,792

SI 2,254

SK 1,387

LT 1,322

LV 1,060

LU 1,043

EE 962

CY 171

Companies 102,55 89,506 53,320 47,104 30,356 28,568 28,254 22,966 17,630 12,736 12,697 11,379 10,771 9,348

Source: Eurostat SBS

Figure 96

Computer services and related activities: turnover by country, € million 2005 (Eurostat estimates)
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

UK

DE

FR

IT

ES

SE

NL

BE

DK 7,358

NO 6,128

AT 6,110

FI 4,707

PL 3,982

HU 2,770

PT 2,366

GR 1,703

RO 1,179

LU 1,021

SI 710

SK 670

BG 284

LT 247

LV 193

EE 184

CY 120

Turnover 86,237 59,721 49,544 37,971 18,223 15,930 15,505 8,314

Source: Eurostat SBS

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Figure 97

Computer services and related activities: employment by country, 2005 (Eurostat estimates)
700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

UK

DE

IT

FR

ES

NL

SE

PL

BE

HU

AT

DK

RO

FI

NO

PT

GR

BG

SK

SI

LT 6,708

LV 6,350

LU 5,109

EE 4,686

CY 1,853

Employed 584,81 395,90 366,94 348,57 195,37 132,47 102,01 80,020 54,821 53,328 47,898 45,736 41,942 38,871 36,131 34,059 19,001 13,919 13,359 8,410

Source: Eurostat SBS

Figure 98

Computer services and related activities: share of total non-financial and non-utility business economy turnover by country, 2005 (%)
3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00
Share of NFNUBE turnover

SE 2.96

UK 2.66

DK 1.94

LU 1.67

FR 1.66

DE 1.61

FI 1.59

IT 1.55

NL 1.53

NO 1.45

AT 1.38

HU 1.34

SI 1.22

BE 1.19

ES 1.00

SK 0.98

RO 0.90

PL 0.82

PT 0.80

LV 0.66

LT 0.66

GR 0.65

EE 0.63

BG 0.49

EU* 1.71

Source: Eurostat SBS

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Figure 99

Computer services and related activities: share of total non-financial and non-utility business economy employment by country, 2005 (%)
4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00
Share of NFNUBE emp

SE 3.91

UK 3.25

FI 3.20

NL 2.85

NO 2.84

DK 2.70

LU 2.50

IT 2.47

FR 2.46

BE 2.30

HU 2.17

AT 2.05

DE 1.94

SK 1.50

SI 1.50

ES 1.47

EE 1.21

PL 1.09

RO 1.08

PT 1.05

LV 1.05

BG 0.79

LT 0.79

GR 0.77

EU* 2.16

Source: Eurostat SBS

Figure 100

Computer services and related activities: breakdown of number of companies by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

LV 30.5 58.5 6.9 2.7 1.2 0.2

SK 34.8 47.0 11.8 3.5 3.0

DE 48.1 40.1 5.9 3.8 1.7 0.3

LI 48.8 40.5 5.9 3.2 1.7 0.0

AT 57.4 37.3 2.8 1.6 0.8 0.1

ES 59.1 33.1 3.9 2.3 1.3 0.3

IT 61.7 32.9 3.5 1.2 0.6 0.1

RO 64.3 30.0 3.0 1.8 0.8 0.1

NL 64.7 28.2 3.7 2.2 1.0 0.2

SI 65.8 27.3 3.6 2.7 0.5 0.1

LU 67.4 22.3 4.6 3.8 1.7 0.1

FI 68.3 22.0 4.1 3.0 2.3 0.4

DK 70.8 21.6 3.8 2.4 1.1 0.3

FR 74.8 17.5 3.3 2.7 1.3 0.4

NO 75.3 19.2 2.9 1.7 0.8 0.1

PL 75.3 22.6 0.9 0.6 0.5 0.1

BE 76.4 18.1 2.4 1.9 1.1 0.2

SE 83.0 13.0 2.0 1.2 0.6 0.2

PT 83.0 14.0 1.6 0.9 0.6 0.1

HU 83.5 14.0 1.4 0.7 0.3 0.0

GR 89.4 7.9 1.3 0.8 0.5 0.1

EU* 67.0 26.6 3.3 1.9 0.9 0.2

Source: Eurostat SBS

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Figure 101

Computer services and related activities: breakdown of turnover by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

ES 3.5 10.4 5.2 7.6 15.4 57.9

DE 3.3 9.8 6.0 10.7 17.9 52.3

FI 4.4 10.2 6.2 9.6 34.0 35.6

FR 3.7 9.3 6.1 13.0 19.1 48.8

NL 6.8 10.1 9.4 12.4 15.2 46.0

PL 13.7 12.5 5.8 6.8 29.7 31.5

SE 13.2 9.8 6.8 10.1 18.9 41.1

DK 10.3 13.8 6.9 10.1 20.2 38.7

SK 1.2 15.9 9.6 15.1 58.2

NO 6.7 15.4 8.5 11.9 22.2 35.3

IT 6.9 16.4 11.2 11.1 17.8 36.5

AT 7.3 18.6 8.5 12.7 30.1 22.9

BE 15.7 13.1 7.7 12.8 27.7 22.9

RO 9.8 17.2 7.6 19.6 31.4 14.4

GR 24.9 9.7 10.9 10.8 35.8 8.0

LU 9.8 11.5 21.5 22.4 34.8

LI 3.3 24.9 12.1 26.0 33.8 0.0

HU 22.4 22.0 11.5 13.8 23.4 6.8

EU* 6.0 11.7 7.4 11.1 19.2 43.7

Source: Eurostat SBS

Figure 102

Computer services and related activities: breakdown of employment by company size (number of employees), 2005 (%)
100%

80%

60%

40%

20%

0% 1 empl 2-9 empl 10-19 empl 20-49 empl 50-249 empl 250 or more

FR 2.3 11.0 7.0 13.0 20.3 46.3

FI 4.8 11.2 6.7 10.8 30.4 36.0

GR 11.7 9.6 6.0 8.7 14.3 49.6

SE 6.6 15.0 9.0 12.4 21.3 35.7

ES 8.3 17.4 7.7 10.4 18.5 37.8

DK 11.0 13.0 8.4 11.6 20.0 36.0

DE 5.6 16.7 9.4 13.7 20.1 34.4

NL 11.9 15.6 10.1 10.6 12.3 39.4

BE 15.8 13.8 6.9 12.3 22.7 28.4

NO 8.3 18.6 10.0 13.3 21.5 28.3

SK 4.4 25.3 15.4 12.1 42.8

AT 15.2 25.3 9.9 12.9 22.1 14.5

IT 15.0 29.2 11.2 9.1 14.3 21.3

LU 9.1 18.9 13.2 24.8 34.0

PL 29.2 26.4 4.4 6.5 17.8 15.7

LV 5.1 35.7 14.7 13.2 22.0 9.3

RO 16.5 28.5 10.4 14.5 18.5 11.6

HU 36.0 20.6 7.9 8.8 12.5 14.2

LI 9.6 31.8 15.5 17.8 25.3 0.0

EU* 10.3 19.0 8.9 11.4 18.2 31.1

Source: Eurostat SBS

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Figure 103

Computer services and related activities: share of personnel costs in value of production, 2005 (%)
50 45 40 35 30 25 20 15 10 5 0
Share of personnel costs in production

LT 23

PL 23

BG 24

RO 27

IT 29

LV 29

BE 32

HU 33

PT 34

SK 34

UK 37

EE 37

SI 37

NL 39

SE 41

DE 41

AT 42

DK 43

NO 43

FI 43

GR 44

ES 45

LU 45

FR 45

CY 48

EU* 38

Source: Eurostat SBS

Figure 104

Computer services and related activities: turnover per worker, 2005 (€ thousand)
250

200

150

100

50

0
Turnover per worker

BG 20

RO 28

LV 30

LT 37

EE 39

PL 50

SK 50

HU 52

CY 65

PT 69

SI 84

GR 90

ES 93

IT 103

NL 117

FI 121

AT 128

FR 142

UK 147

DE 151

BE 152

SE 156

DK 161

NO 170

LU 200

EU* 125.5

Source: Eurostat SBS

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Figure 105

Computer services and related activities: value added per worker, 2005 (€ thousand)
100 90 80 70 60 50 40 30 20 10 0
V.A. per worker

BG 9

RO 12

LT 14

HU 15

LV 15

EE 17

PL 18

SK 22

PT 29

SI 33

GR 38

CY 41

ES 43

IT 44

NL 60

AT 60

LU 64

FI 65

BE 67

FR 68

SE 69

DE 76

DK 77

NO 85

UK 89

EU* 63.3

Source: Eurostat SBS

Figure 106

Computer services and related activities: wage adjusted labour productivity (apparent labour productivity by average personnel costs), 2005 (€ thousand)
200 180 160 140 120 100 80 60 40 20 0
Adj. Lab. Prod

LU 95

BE 104

IT 106

SE 108

HU 109

AT 113

FR 114

ES 116

NO 119

SI 119

EE 119

DK 122

FI 124

GR 124

NL 125

DE 128

PL 129

PT 133

CY 139

SK 139

BG 155

UK 161

LT 173

LV 177

RO 184

EU* 126

Source: Eurostat SBS

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Figure 107

Computer services and related activities: turnover per worker by company size, 2005 (€ thousand)
250.0

200.0

150.0

100.0

50.0

0.0 2-49 empl 50-249 empl 250 or more

RO 23.3 47.7 34.9

LI 35.6 49.2

EE 40.9 46.2

PL 33.5 82.9 100.0

HU 66.0 96.9 24.9

GR 115.5 223.6 14.4

ES 61.2 77.6 143.1

IT 81.2 128.9 177.8

FI 109.6 135.4 119.7

NL 102.7 143.9 136.8

AT 105.2 174.1 201.3

FR 129.8 133.7 149.8

SE 114.8 138.4 179.8

BE 154.6 184.8 122.3

DE 100.2 134.2 229.0

DK 150.0 162.5 173.2

NO 144.6 174.7 212.1

EU* 91.2 125.0 166.5

Source: Eurostat SBS

Figure 108

Computer services and related activities: value-added per worker by company size, 2005 (€ thousand)
120.0

100.0

80.0

60.0

40.0

20.0

0.0 2-49 empl 50-249 empl 250 or more

RO 9.3 19.2 15.7

LI 11.7 21.6

EE 17.2 23.2

PL 16.2 39.0 14.5

HU 12.1 33.1 36.1

GR 48.5 93.9 6.1

ES 32.1 43.5 58.8

IT 34.2 55.5 73.0

FI 50.9 76.6 69.9

NL 52.8 65.9 75.7

AT 50.3 77.9 95.0

FR 56.8 68.7 68.8

SE 60.1 68.4 74.1

BE 65.5 83.3 63.9

DE 55.9 65.5 108.0

DK 74.9 73.9 91.0

NO 76.6 94.7 100.8

EU* 43.5 60.5 77.3

Source: Eurostat SBS

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8 Facilities Management

8.1

Introduction
The development of facilities management has been raised as an important development for operational business services provision. This chapter provides a brief overview of the understanding of facilities management and potential policy issues.

8.2
8.2.1

Facilities management – terms and definitions
Different views on facilities management The term “Facilities Management” (or “Facility Management”, named hereafter FM) has a very general meaning and covers different aspects in different countries. In the US FM is strongly focused on workplace efficiency and management of the facilities. Compared to the UK definition, the American definition pays more attention to the technical issues and installations. The main target is the physical workplace. In the UK (and some other European countries) facilities management has a wider definition than simply the management of buildings and services. The UK employee based approach pays relatively less attention to the technology. Most attention is paid to the core business and employee support. The definition of FM provided by the European Committee for Standardization (CEN) and ratified by BSI British Standards is: “Facilities management is the integration of processes within an organization to maintain and develop the agreed services which support and improve the effectiveness of its primary activities”. The British Institute of Facilities Management has formally adopted the CEN definition but also offers a slightly simpler description: "Facilities management is the integration of multi-disciplinary activities within the built environment and the management of their impact upon people and the workplace" Finally, in many other European countries (e.g. Denmark, Finland) FM is understood as a user-based management that can contain all the facility services and tasks from the strategic to the operational level. The main connecting point is that it is supportive to the core businesses. This broad view on FM can also be found in Australia, where the term “Facilities Management” has even been replaced by “Commercial Services” in some organizations. Commercial services can define services other than just looking after facilities, such as security, parking, waste disposal, facility services and strategic planning.

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8.2.2

Facilities Management sector: different players The FM industry can be defined as the group of companies delivering and providing a range of facility services to a client either directly or by sub-contracting, where the emphasis is primarily on the management aspect of these services. Three different types of FM companies can be distinguished: the managing agent, the managing contractor and the total facilities management company. The managing agent is an external organization or individual who manages the client organisation’s own employees. This type of facilities management organisation is rather unusual in most European countries, but often used in the UK. A more broadly used type is the managing contractor. In the managing contractor arrangement there is one contract between the client organization and the appointed contractor. Subcontractors are under contract to the managing contractor and do not have a contractual relationship with the client organization. As such, client companies have a single point of contact with the contractor on all matters pertaining to service provision.
Figure 109: Managing Contractor
150

A third type of facilities management service provision is total facilities management (also called “integrated FM” or “total workplace management”), an arrangement where all facilities of a client are managed by an external entity for a fixed price. This model offers an advantage for one organization to manage and run all facility services. It is considered to cause less transactions and costs compared to the multi-level contractor models.

150

Based on Atkin B. & Brooks A. (2000), Total facilities management, Blackwell Science, 180 p.

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Figure 110: Total facilities management

151

The outsourcing of facilities management by client companies is growing in importance and more and more companies are supplying facilities management services to third parties. Companies that are in anyway related to facilities or the services are entering the market. These organizations are, for example, technical installation companies, construction companies, IT-companies, cleaning companies, specialized FM service providers or real estate companies. This makes the group of companies that are active in facilities management very diverse.

8.3 Demand side conditions
The recent boom in outsourcing facilities management is driven by a continuous process of client firms to focus on core business activities and getting rid of non-core business related activities. This process started in the 1980s and 1990s, when companies started to outsource the traditional services that were not important to their core businesses: cleaning, outdoor maintenance, housekeeping, food service, security, etc. However, the most important services as well as the management of the different services and service providers mostly remained in-house (The traditional corporate management model).

151

Reference see footnote 1

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Figure 111: Traditional corporate management model

152

With increased competitive pressure in most industries demands companies to become even more productive, streamlining processes and freeing up time to focus on what the company can do best, recent years have seen increasing outsourcing of the management of facilities and facilities services. Moreover, a growing number of owners are also selling their real estate assets to outside investors. This kind of “sale and lease-back” model is becoming especially popular with organizations that want to activate all or part of their assets to their core businesses. This evolution has meant that client companies more and more start looking for companies that can provide them with a total package of supporting services.
Figure 112: Outsourcing since 2000
153

152 153

Tuomela A. & Puhto J. (2001), Service provision trends of facilities management in Northern Europe, 104 p. Based on Larkas E. (2000), Outsourcing: case Sonora and ABB Finland, presentation

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8.4 Supply side opportunities
With the above evolution, the facilities management industry is confronted with an increasing demand for facilities services management (i.e. managing and providing either through own supply or sub-contracting - the different facilities services for a client company). This increasing demand holds interesting business opportunities for the traditional service providers (e.g. cleaning companies, catering, security services), as many find themselves in a position of providing ‘low value added’ (see e.g. the sector analyses on the cleaning industry and security services industry). Entering the market of facilities management allows these firms to ‘move up the value chain’. By not only providing one (or more) facility service(s) themselves, but also managing all facilities services contracts for client companies, they significantly enlarge the value added that they can provide to client companies, which hopefully translates into higher profit margins for the service provider. Moreover, the broader scope of activities gives the companies new possibilities to improve time management of personnel. As a consequence many ‘new’ FM companies – mostly facility services providers originally – enter/have entered the FM market and try to evolve to a business model that allows them to offer clients a ‘total facilities management’ service package.

8.5 Future challenges in total facilities management
Despite this increased demand for more integrated FM and the seemingly attractive business opportunities for many (especially low value added) service providers attached to this evolution, in reality total FM seems to be a very complex service to deliver. After a period characterised by enormous expectations from demand side and great promises from the supply side, in many cases this was followed by even greater disappointment. Client companies making use of total FM contracts wanted positive results relatively fast. It was often seen as a quick fix problem solver to facilitate change or manage a peak demand. Total FM companies on the other hand were often too small to deliver the services that client companies had hoped for, especially in the short run154. As a reaction to these bad experiences, client companies returned to the in-house provision of FM. As the industry is now evolving towards more realistic expectations when it comes to total FM, some important elements to guarantee a more successful client-service provider relationship become clear: Importance of partnering and trust in client-service provider relationship: Delivering management services is very different from delivering operational services such as cleaning or catering. Management services contracts much more require a good matching of organisational cultures and demand patience and time to build a good level of understanding and trust between client and service provider. Based on
154

A recent survey of the British Institute of Facilities Management (2007) has shown that more than 60% of the survey participants agree that delivering total facilities management services is too complex for most suppliers and thus that the market is still some way off from providing client companies with this “one-stop-shop” for their facilities services management.

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UK experiences, it is said that it takes about 5 to 7 years to optimally build this partnership and achieve the expected results. It can be expected that the evolution towards such “partnership thinking” will have a visible effect on the average contract length in the FM industry. Different approach in contracting: Whereas for more operational services contracts can be mostly “input-driven” containing long lists of duties and detailed prescriptions, management services contracts are better “output-driven” with more attention to describing what needs to be done, rather that how t is to be done. This makes management contract models less complicated and enables the management and service provider to adapt more easily to changes in the client organisation. This approach is more in line with the evolution towards the partnership thinking in the client-service provider relationship and the evolution towards longer period contracts. Quality standards and measurement: A major issue with many “bad experiences” in the past was related to service quality. As in many other services industries exact quality definitions are non-existent and were often not included in contracts, leaving much room for discussions. In several sub-domains of total FM, such as in the cleaning industry, a lot of work has been done to develop better quality standards. However, these initiatives are branch specific. An all-encompassing total FM standard is very hard to develop. To give an answer to this quality issue, and closely related to the different approach in contracting, it is expected that quality measurement in FM services contracts will be more based on output and performance-based measurement, including SLAs and KPIs in the contracts to guarantee outputs and control quality.

8.6 Potential policy implications
The above discussion clearly shows that the facilities management “industry” involves a wide range of activities and different types of companies, which exceed the boundaries of any traditionally defined industry (even exceeding the broad classification knowledge intensive/less knowledge intensive services), but is related to many industries. Policy makers are confronted with the challenge to develop a more integrated view on FM, apart from the traditional sector boundaries. At the same time, many policy initiatives that have already been taken in different sub-domains relating to FM (cleaning industry, private security, etc.) should not be neglected. As activities from different industries are to be combined within one FM company that has to comply with legislation and regulation relevant to several sectors, possible conflicts may arise in terms of standard requirements etc., thus hampering the development of a real total FM company.

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