When Your Protégé Comes of Age
1 March 2007 Christopher Cole
Companies in Central and Eastern Europe are now facing stiff competition from the workforces they once trained. Chris Cole, CEO of the WSP group, explains how to compete at the local level.
WSP entered the Central and Eastern European (CEE) market relatively late, with its Swedish and Finnish operations leading its expansion into the region. In 2005 it increased its presence in this exciting and challenging market with the purchase of building services consultancy GW, which has a strong track record of working in CEE, particularly Romania.
Although WSP entered the market relatively late, the company believes that the region still offers excellent business prospects. Most of its competitors have been active in the region for much longer, predominantly entering on the wave of EU funding flowing into the region. Nonetheless, results to date have shown that opportunities still exist, although both their nature and funding sources are changing. CEE suffers from misguided and negative publicity, a legacy of its troubled history. This has resulted in the region suffering underinvestment and thus slow economic development.
Working in CEE can be both frustrating and rewarding. Investors need to keep in mind that the region comprises a vast array of nationalities, religions and politics, all of which need to be accommodated sensitively.
Doing business in the region can be complex, as there are no standard procedures and routines – it is down to the international business community to help set these up – and you have to understand the local culture.
The challenge is to adapt to the inevitable changes, to learn to work in these new markets and to foresee how the region will be in five to ten years time.
DEVELOPMENT GATHERS PACE
As investment starts rolling in, development is speeding up, and there are huge rewards for being one of the first to invest in the newest countries, such as Bulgaria, Romania, Ukraine and Russia.
Eelko Korteweg, formally commercial director, Central Europe, for ING Real Estate Development and now a director of Primavera Development, a major developer in Romania, says the Romanian market is very healthy, with demand for office, retail and residential development far exceeding supply.
Primavera is about to complete a 50,000m² gross leasable area office development in the north of Bucharest, with anchor tenants including ING Romania, CMS Cameron McKenna and other multinationals. The development will be completed by mid-2007 and has been 75% pre-leased.
Korteweg says that with developers such as Primavera attracting institutional investors, progress is very rapid. In addition, many international developers are testing the waters and have purchased land in the capital or secondary cities, predominantly for retail development.
Romania is likely to follow the pattern of earlier EU entrants, such as the Czech Republic, Slovenia, Poland and Hungary, where the economy boomed following EU accession before slowing down as it became more regulated and controlled. Early investors saw significant yields on their investments; but as the risks diminish, so do the rewards.
A DOUBLE-EDGED SWORD
One challenge that is starting to emerge is competition from within CEE. As international companies enter the region and train local staff, they will eventually have to compete with the very same local professionals they originally educated.
This is certainly happening in the public sector across CEE. Funds and loans are pouring in from the European Community, the European Investment Bank and the European Bank for Reconstruction and Development to finance major infrastructure projects, representing major business potential for consultancy firms.
There is considerable competition for this type of work, notably from an increasing number of local companies, which are starting to win contracts that were previously handled by international consulting firms.
This is to some extent a result of training projects and partnership contracts that have been going on for several years under EC-financed programmes. Another factor is that procurement processes are increasingly handled in the local languages.
International clients investing in these countries require their suppliers to deliver services of an international standard, but they also demand in-depth local knowledge. It will only be a question of time before they start to expect knowledge of local regulatory procedures and language, which will favour firms employing local staff.
LOCAL KNOWLEDGE IS VITAL
WSP has seen a shift towards a more local market, where in-country consultants have developed the necessary skills to undertake the work. A premium is no longer placed on foreign expertise, which means international companies increasingly have to compete at local rates.
Some countries, such as Poland, have already undergone the transition and operate at local fee levels. WSP Polska, set up as a new business manned by expatriates in early 2000, is now a truly local operation manned exclusively by local staff. The same can be seen in Estonia and the other Baltic States, where WSP Sweden is leading WSP's expansion. Continuing inward investment means plenty of work for highways, buildings, bridges and energy services experts, but the market now demands local engineers at local fees.
In Romania there has been a huge increase in private sector development, predominantly in and around the capital, as well as plenty of EU-financed work in the infrastructure and environmental sectors. Now that it has joined the EU, billions of euros in EU funding have been allocated to Romania, together with a further influx of international private investors.
WSP established an office in Bucharest in early 2006, manned by a team of locals and expatriates, supported by experts from the WSP Group. It is involved in major commercial and residential developments in Bucharest for clients from a wide range of countries, including Romania, Germany, the Netherlands, Austria, the US and the UK.
Romania's legacy of industrial pollution has opened up many opportunities for WSP to carry out remediation projects for clients who must now comply with stringent EU standards.
The group expects its Romanian operations to continue to expand over the new few years, but at the same time, it is aware that it will eventually have to make the transition to the local market.
REALLY ENTERING THE MARKET
The best strategy for investing in this region is to exploit the influx of investment brought in by developers such as Primavera and to develop local operations, with the ultimate aim of becoming a local company.
WSP is educating the local market, training staff in the WSP mould and providing them with the opportunity to gain real experience while ensuring that they are capable of undertaking tasks to the standards expected by its clients around the world. It is also developing strategic relations with a network of local consulting firms.
All this will enable WSP to compete on financial terms in this promising region as it develops, and to benefit from its enormous potential.