Published: January 01, 2000
For the earliest corporate adopters, the lure of shared service centres was all about saving money. And why not? The appeal of streamlining and improving the consistency of redundant, transaction-oriented activities, often in low labour-cost locations, was an obvious driver behind the creation of shared service centres. Such savings are quantifiable and relatively easy to sell to the C-suite and boardroom.However, as the world’s business environment continues to move toward globalisation, not to mention the advent of new technologies that are creating more robust treasury management systems and ERPs, the second and third iterations of shared service centres offer additional benefits that might make the plain vanilla cost savings almost tertiary. Perhaps tertiary is a slight exaggeration as cost controls are always in the spotlight, but the fact remains that today’s global companies are being compelled to explore and extract the more powerful, strategic benefits of shared services centres.
The process of establishing a shared service centre can seem daunting and fraught with risks. The question we hear more and more from our companies is: exactly how and where do we start? This article endeavours to address those questions succinctly by:
Is the shared service centre concept something that your business should consider? Ultimately, that depends on a host of questions specific to your situation; however, it’s a safe bet that any large, multiregional organisation stands to gain by implementing some type of shared services strategy. We can make that generalisation simply given the ongoing trend toward globalisation, whereby companies continually seek to expand into new markets while tapping into less costly labour pools and supply chains. Quite simply, the more disparate a company’s geographic footprint, the more likely that shared service centres will yield benefits.
Many of our international companies begin investigating shared service centres as a means to centralise and simplify information and metrics required to optimise working capital. Accounts payable is often the starting point since improving the accuracy and efficiency of redundant, transaction-based work, as well as eliminating headcount, are well-documented benefits of regional accounts payable centres.
From there, the shared service concept can extend the easy-to-quantify cost benefits to other areas. Adding in regional accounts receivables, accounting, human resources, customer services, technical support and other back office functions can lead to further savings. All this enables an organisation to focus more on its core business rather than expend finite resources on nonrevenue-generating cost centres.
In the end, however, the true power of the shared service model is about data and visibility. Bringing consistency of processes across geographic borders not only improves compliance, but it also gives treasury the ability to manage liquidity, unlock trapped cash, and overcome the challenges associated with cross-border transactions. Better controls lead to better visibility and forecasting, which in turn allows treasury to proactively support longer-term strategic objectives of the organisation. In fact, treasury should always be a key stakeholder in company strategic objectives such as working capital initiatives, merger activities, technology alternatives, etc. Success of these types of initiatives can often be greatly facilitated by a shared service centre environment.[[[PAGE]]]
The true power of the shared service model is about data and visibility.
Perhaps convincing the C-suite that the longer-term benefits of shared service centres outweighed the near-term investment and potential risks inherent to any large-scale project was once an obstacle. Today, many of the benefits are widely understood and accepted. But that doesn’t make the launch and implementation of a shared service centre any less challenging. In fact, many companies understand the value but are still overwhelmed by the magnitude of the task.
At the outset, it is still imperative to design a business case and make a comprehensive plan that defines and documents the project scope and anticipated benefits. This includes answering several critical questions, including:
Is the shared service centre going to be a regional payment factory exclusively focused on accounts payable so the company can easily control most of the processes?
Should the concept be extended to receivables and open the door to currency (FX), language and legal challenges?
You must also define the specific roles and approval responsibilities that employees will assume in a new shared services structure, along with the reporting matrices.
Often, companies believe that they must centralise all processes into a super shared service centre or else the project is not worth the effort. That, however, can undermine success. There are circumstances where a narrow focus is preferred.
In other cases, a measured, stepped approach might be more appropriate, whereby accounts payable is centralised first, but the solution is scalable and can phase in other accounting functions, working capital, credit or additional countries over time.
In addition to defining the actual scope of services, location is another component vital to the ultimate success of your strategy. Settling on a location will be based on a variety of factors, including your organisation’s current operations and future expansion plans. Having no Asian operations does not preclude you from selecting India or China as a location under some circumstances; however, a centralised payment centre will most likely prove best suited to a regional location.
Access to qualified and affordable labour is obviously a key criterion. India is one of the most mature offshoring locations, thanks to its technically educated labour force offering excellent accounting and finance skills, along with the almost universal use of the English language. Eastern Europe is also emerging as an excellent location for similar reasons.
Political stability and legal issues of the host country should not be overlooked during site selection. Lower labour and real estate costs in developing economies, for example, should be measured against underlying political risk. And there are always cultural issues surrounding any country that may be chosen, not to mention country-specific foreign exchange controls that may need to be addressed.
Additional site selection criteria will also include: tax considerations and the potential for negotiating government incentives that can tip the scales to a particular location; real estate trends and construction costs; social and economic instability; time zones; availability of an established technology infrastructure; and even the potential for natural disasters and corresponding emergency preparedness. [[[PAGE]]]
All these factors need to be given credence to determine ideal locations. Visits must be a prerequisite to all finalist sites. It might bear mentioning not to overlook the perceived higher-cost locations of the US, Canada and Germany, among others. There are advantages of accessing a skilled labour force and quality of life issues, not to mention the potential political upside gained by creating onshore jobs, which may prove to be far more valuable than a lower cost labour pool elsewhere.
Finally, a third leg of the stool in developing a robust shared services strategy is all about systems and technology. It is not uncommon to be implementing a shared service centre at the same time that a new regional or global ERP solution is being rolled out or upgraded. Although that may complicate matters an integrated planning process must take that into account.
In a perfect world, business processes will drive technology selection, but in the real world, it’s often the other way around. This fact emphasises the importance of all key stakeholders being a part of a true team effort in designing, building and establishing your shared service centre. Leveraging the proper technology enables businesses to improve and streamline banking, working capital and accounting integration by automating business processes and standardising data communications and file formats. An integrated planning process needs to take into account all issues that apply, including how the internet and e-commerce platforms will interact with a company’s legacy systems, as well as how banking systems will be integrated with the new shared service centre.
Web-based channels may be an excellent tool for ad hoc functions and investigations, but there may be issues with scalability. Plus, web-based solutions may not provide for the same level of standardisation as host-to-host solutions. Issues regarding selecting and standardising file formats that are supported by your ERP and that can be leveraged in ad hoc and/or banking and third-party software must be evaluated and discussed.
It is important to reiterate that during any integrated planning process the cost-benefit analysis should not be focused exclusively on the parochial hard dollar costs. There are upfront expenses for establishing regional shared service centres, including real estate, moving and staffing costs. There will also be risks and a learning curve associated with new processes.
A large-scale project like this is also an ideal opportunity to identify best practices prior to moving to a shared service environment. Now is the time to fix or design your new processes; never migrate inefficient ones to your shared service centre. All of the changes that produce both quantitative and qualitative benefits and savings need to be continually measured as they emerge from your shared service centres over time. These include the ability to gain a more thorough understanding of all your company’s business and clients, both upstream and downstream. This will pay dividends to your organisation through better strategy and decision making. [[[PAGE]]]
A third leg of the stool in developing a robust shared services strategy is all about systems and technology.
Even the most sound shared service strategy can be undermined if there is a failure to execute. Implementation is key. Migration towards a shared service model must be made with the implicit involvement, even leadership, of the company’s treasury department. The real value beyond streamlining and reducing transaction-based costs is usually derived by improving liquidity and cash management. Better reporting and data availability typically provide treasury with the ability to develop forecasting tools that will help shape broader strategic business decisions. The company’s treasury department should always be engaged up front to ensure that new working capital processes will be as efficient as possible and appropriate controls are implemented.
There are a variety of other oversights that companies often make in rolling out a shared service centre. Over-aggressiveness is one. Everyone wants to achieve goals quickly, but there are limitations to the acceptable pace of broad-based change. While it is certainly true that migrating additional business units or regions into a shared service centre will multiply the benefits, sticking to unrealistic and arbitrary timelines for implementation could jeopardise success. Most organisations move towards shared services in an incremental approach, starting with one or two of the most basic processes, such as accounts payable or receivable.
Another typical oversight is not giving enough credence to cultural issues or being sensitive to internal stakeholders’ appetite for change. It is only human nature that some local business units will react with fear or scepticism. Plus, existing human resource practices for existing employees may not be culturally appropriate in the new shared service centre location. New roles, managers and processes can also cause uncertainty with regard to job security, and these issues need to be confronted openly if the shared service strategy is to be fully embraced at the local level. Failure to do so can result in unhealthy turnover and a difficulty in maintaining a critical mass of talent. As with any change management scenario, open dialogue and constant communication is necessary to secure buy-in at all levels.
There are other best practices to consider during a shared service implementation, including:
Migrate transactional, back-office activities before customer-facing and skill-intensive activities.
Roll out a broad, but homogeneous, scope of services across business units, even if it means bringing fewer business units on board at a time.
Align the interests of all stakeholders by adopting negotiated service-level agreements between shared service centre and business entities.
Standardise wherever possible. That not only refers to the data and technology platforms, but also new processes as they migrate into the shared service centre.
Ensure change management costs and considerations are included in your business case.
Once the new shared service centre is established and functioning, you need to use an evaluation process to build and maintain your momentum and extend the processes and benefits. Evaluation is not a one-time event, but rather an ongoing process that will enable the company to grow into an organisation of continuous learning and operational excellence.
As processes and transaction responsibilities migrate from a particular business division to the shared service centre, using formal service-level agreements is instrumental in helping articulate expectations. Pre-negotiated service-level agreements are sometimes associated solely with outsourcing, but that does not need to be the case exclusively. Service level agreements can still be used even if in-house company employees staff the shared service centre.
Continuous evalutation and measurement of the shared service strategy is not static but rather am ongoing process.
Key performance indicators should also be used as a means to evaluate progress to gain an accurate picture of the before and after. These tend to focus on the quantitative, such as pricing, transaction volumes and response times; however, qualitative customer service evaluations should not be overlooked either.
In reality, it’s all about changing one’s mindset from being a cost-centre (burden) on the company to becoming a positive change agent and strategic player that can improve margins and have a meaningful impact on overall profitability. Expectations need to be clearly defined, but so do the consequences of not meeting those expectations. Service agreements, performance indicators and benchmarking are the means by which everyone’s interests can be aligned and used to foster cooperation. Choosing the right incentives and measuring them regularly can be used to leverage co-operation and address the natural resistance to change inherent to implementing a shared service strategy.
After your shared service centre has been optimised and is running efficiently, it may be appropriate for you and the company to consider outsourcing as an appropriate next step. This opens the potential to mining additional savings by possibly transferring some functions to an external service provider using long-term contracts and, of course, service-level agreements.
Continuous evaluation and measurement of the shared service strategy is not static but rather an ongoing process. In other words, once you’ve optimised your shared service centre and reached your initial goal, it’s time to review your wins and processes again and again as you continue to raise the bar and bring additional strategic value to your company.
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