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(Part 3 of the Doing Business in Ireland series)
Cost management is probably one of the most complex tasks in business. And it has never been as challenging as it is now with the prospect of a “no-deal Brexit” looming. Despite the current uncertainties, the costs of setting up and maintaining companies in Ireland have improved greatly in recent years to help Irish firms become more competitive internationally. Equally Ireland has also become a more attractive location for overseas firms to base their operations. The benefits that Ireland offers to businesses (including a skilled workforce, low corporate tax regime and supports for business) go a long way to offsetting some of the costs of operating a business in Ireland
Cost management is by necessity the cornerstone of the business planning process. Simply put, cost management allows you to optimise available resources, make sound judgements and control project costs effectively. It is the process which ensures that business activities are completed within the predetermined parameters of budget, scope and timing. One of the reasons businesses fail is often due to lack of capital and funding. There are many reasons why this might happen but two of the most frequent are: a) cost of sales not in line with sales prices and b) expenses are not monitored and get out of hand. Both reasons lead straight back to effective cost management.
But there’s another reason why managing your costs is critical to success: constant monitoring of costs allows you to take corrective action when appropriate. Have costs increased? Are we maintaining profit margin? Are we cost competitive? Is our location cost competitive? – these are all questions which should be asked continually. When costs are monitored and controlled properly, issues will be flagged ahead of time enabling corrective action. Therefore, managing costs is key to remaining competitive in an increasingly pressurised global marketplace. It is often the difference between success and failure.
However, it’s not just companies that need to manage costs. As the “global village” becomes reality, the onus is on countries to maintain their cost competitiveness. For small open economies like Ireland, this poses something of a challenge. But, ultimately Irelands’ cost competitiveness is what determines the ability of Irish companies to compete in domestic and international markets. Ireland offers key benefits to start ups and multinationals such as the relatively low cost of incorporation and tax registration and the ease of setting up a business. And in fact, Ireland is holding its own in the competitiveness tables as illustrated below:
The National Competitiveness Council (NCC) Cost of Doing Business in Ireland in 2019 report released in April compares the costs faced by Irish based businesses relative to costs in key competitor jurisdictions. Using the latest available international data, the report benchmarks a range of indicators from labour costs to business services costs as summarised below:
Labour costs can be difficult to control and often represent a significant portion of a company’s overheads. Since 2014, Irish labour costs have started to increase in line with the growth in labour costs in other jurisdictions. The last data shows that Irish labour costs increased by 2.9% in 2018 – which is concerning as it is four times higher than the inflation rate. Labour costs vary considerably between sectors. In Ireland, labour costs are highest in the utilities sector (€55/hour) and are lowest in the accommodation and food sector (€16/ hour). In most sectors, labour costs were greater than, or equal to, the UK.
Currently, prices in Ireland are comparable to other jurisdictions that would traditionally be thought of as high cost, such as Japan, the UK and the Netherlands. Global mobility expert, ECA International, recently published new research indicating that Dublin is now the 5th most expensive city in which to rent in Europe. In fact, it is more expensive than cities such as Amsterdam, Paris and Stockholm. In 2018, the cost of living in Dublin was 18% more expensive than living in Brussels.
Over the last year, there has been a steady increase in commercial property prices and the cost of constructing office space. In the office rental market, prices are up 15.9% in Dublin (suburbs) and up 16.5% in Galway since 2014. Despite a relatively steady pace in growth, rental prices of prime Irish office space are still lower than Paris and London (although considerably higher than Amsterdam, Berlin and Brussels).
In recent years, aggregate transport sector prices in Ireland have increased moderately. Prices in all transport sectors (except sea and coastal transport) have steadily increased, with postal and courier services recording the highest price increase, followed by warehousing, storage and cargo services. While it may be more expensive to export from Ireland, Irish administrative processes are highly efficient and compare very favourably with processes in competitor markets.
Certain utility costs (including electricity and gas) tend to be higher in Ireland than other jurisdictions, while Ireland is more competitive regarding other utility costs (telecoms). The EU is among the most expensive locations for electricity and gas globally – and within the EU – Ireland is one of the most expensive countries for electricity for both large and small users. In all sectors pressure on prices is being increased through competition.
In Ireland, the overall price of services is rising much faster than the price of goods. In total, the price of services has increased by 7% since 2015, but this masks widely different changes in the price of certain services. For example, the price of warehouse, storage and cargo handling services increased by 6.2%, while sea and costal transport prices declined by 0.2%.
Moreover, services prices in Ireland are rising relatively quickly compared to other EU countries. Luxembourg is the only economy measured where services prices increased faster than Ireland.
In conclusion, Professor Peter Clinch, Chair of the National Competitiveness Council stated earlier in the year that “we can’t be complacent. The importance of staying competitive must remain a constant focus….and is the only response to the serious and imminent danger presented by Brexit”. Ultimately cost management plays a vital role at every level so that we don’t price ourselves out of international markets.
Whether you are an Irish or overseas business contact us for help and advice in setting up your company in Ireland and advising you on the potential costs for your business in Ireland.