Published: March 01, 2010
Over the past twenty years, shared service centres (SSCs) have grown in importance as a means of standardising financial processes such as payments, creating economies of scale and lowering costs. Initially, SSCs were established by large multinational corporations, but a wide spectrum of organisations that seek to establish central visibility and control over financial processes are realising the benefits of a shared services environment. With many companies now operating mature and efficient SSCs, this article looks at how leading corporations are addressing today’s business challenges and leveraging new opportunities in their SSCs, creating greater value for the business.
Citi has been a pioneer in providing the tools, services and expertise to help finance managers maximise the value of their SSCs for many years. In December 2009, we hosted a SSC Forum in Dublin, attended by senior managers from some of the world’s leading SSCs. This event was intended to facilitate dialogue on trends, challenges and amongst SSCs and to forge the way ahead in establishing and implementing best practices. Inevitably, a business process that is used successfully in one organisation cannot simply be replicated in another, but there is considerable value in understanding what has worked well and how business processes have been implemented most effectively.
Centralising payments processing through SSCs or payment factories has been one of the great successes of recent years. Based on our experience of providing transaction services to over 500 SSC clients, we see around 85% of regional SSCs taking responsibility for payments processing (figure 1). Having centralised this activity with demonstrable success, there is increasingly pressure on SSC managers to create further value. There are a variety of reasons for this, such as:
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There are a number of important new drivers and enablers that are shaping the evolution of SSCs (figure 1) although these will differ according to each company’s business model and priorities. Nevertheless, it is important for SSCs to recognise these trends, evaluate their impact on their own organisation and prioritise accordingly.
In response to these growing demands, SSC managers are seeking to add further value to the enterprise by pursuing objectives in three key areas:
i) To expand the geographic scope of the SSC’s activities;
ii) To extend the range of business activities supported by the SSC;
iii) To increase the efficiency and cost effectiveness of existing activities.
Although many organisations are achieving considerable success in achieving these objectives, the first two are arguably the most challenging. For example, expanding the geographic scope of the SSC may be particularly difficult where business units or regions have a high degree of autonomy, or where senior management does not have a focus on creating regional or global synergies. This is often the case where a company has grown by acquisition or conducts quite diverse business activities. Expanding the scope of the SSC to incorporate new processes can also bring challenge and complexity, as illustrated in figure 2, resulting in varying degrees of centralisation of financial or business support activities. However, as pressure on working capital and liquidity optimisation continues, and management support for SSCs increases, we see that collections, reconciliation, cash and liquidity management, payroll and travel and entertainment (T&E) management are increasingly the focus of centralisation efforts.[[[PAGE]]]
In addition to expanding into new regions or activities, however, a critical way in which many of the world’s leading SSCs are increasing the value they deliver is by increasing the efficiency of activities for which they are already responsible, such as payments. With most companies envisaging brighter economic conditions ahead, SSCs are tasked with consolidating and optimising processes to position the business for growth. Furthermore, there are significant opportunities available today, particularly from a technology standpoint, that were not available five years ago; SSCs that can leverage these opportunities can increase margins, enhance financial efficiency and create competitive advantage. However, inevitably, there are hurdles to expanding and enhancing the role of the SSC. Some of the challenges that we are helping our clients to address include the following:
Many SSCs are challenged with providing metrics or key performance indicators (KPIs) to demonstrate value and ongoing improvement to business performance in quantifiable terms. SSCs are at different stages of this process; for example, the first step is to determine what KPIs are most important in delivering real value to the business, and how these should be measured. Some of the KPIs most relevant to SSCs include those in the areas of: Operating Metrics, Financial Results, Customer Value, and Employee Development (Figure 3). Each organisation would tailor these or other similar metrics according to its goals in alignment with overall corporate strategy. Secondly, although there are tools available to help with measuring KPIs and identifying where improvements can be made, data first needs to be collated and integrated in a consistent and meaningful way. At Citi, we have been working with our clients to create tools to ease the process of identifying and measuring KPIs. With the right tools in place, finance managers can spend less time on compiling the data and more time on evaluating the results and planning accordingly.
A second area of opportunity for SSCs is the growing recognition of the value of straight-through reconciliation (STR). For example, while measuring, and setting incentives based on improvements in days sales outstanding (DSO) is a very useful means of collecting cash more quickly and reducing credit risk, it needs to be complemented with STR in order to be a truly valid and valuable measure. Automating receivables reconciliation and establishing measures to accelerate and reduce exceptions to this process increases cash availability, enables customer credit lines to be freed up more quickly, and improves customer relationships. We have found that although SSCs are often very effective in conducting processes such as payments in an automated way, reconciliation is frequently still undertaken manually, so the SSC cannot scale up to support increased volumes, controls are compromised and there is excessive reliance on a few key individuals. However, there are increasingly solutions for the efficient and timely import of data, automatic, intelligent reconciliation with the ERP or treasury management systems, and sophisticated reporting.
Communication and Integration. Addressing the third challenge frequently highlighted by SSC executives is key to continuously adding value and creating competitive advantage. Integrating data from multiple sources in a secure, consistent and timely manner has proved increasingly difficult for SSCs as their geographic reach and their scope of activities expands, resulting in a growing number of internal systems and external banking partners with which they interact. Today, with far greater collaboration across the financial community, there are increasingly ways of improving both the communication process and the consolidation of financial information for increasing cash visibility, managing risk and measuring performance. For example, three industry standardisation initiatives that are already adding value to SSCs are SWIFT, ISO 20022 and SEPA. Although we are not able to discuss these in detail in this article, there are some important ways in which these initiatives can help SSC managers achieve their objectives, and we will be pleased to give further advice and information.
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With new opportunities for corporate connectivity initiated by SWIFT in recent years, corporations are now eligible to connect to their banking partners through SWIFTNet, the global network traditionally used by the banking community for secure, real-time financial messaging. SSCs and treasuries can connect to all of the 8,300 banks who are members of SWIFT through a single channel, and exchange a growing range of financial messages, including payments, confirmations and account statements. This reduces the number of proprietary bank interfaces and systems that need to be maintained, and enables banking communications to be conducted in a secure, consistent way globally.
Although SWIFT enables companies to communicate with their banks through a single channel, there is also the problem that banks frequently format data such as MT940 messages in different ways, which then need to be consolidated; internal systems also hold and transmit data in diverse formats. Today, there is a common commitment to the development and use of standard formats for financial messaging across stakeholders (including banks, SWIFT, standards agencies, technology vendors and corporates). These stakeholders have agreed on XML (extensible mark-up language) as a basis of financial messaging, including ISO 20022 which is the format used for SEPA payments. By establishing a common means of identifying disparate data held in each system, the cost and complexity of mapping, translating and transforming data across multiple software and hardware platforms is eliminated. Considerable progress towards ISO 20022 is being made and SSCs can already start leveraging XML opportunities to ease the process of data integration and consolidation.
SEPA payment instruments, including SEPA Credit Transfers and SEPA Direct Debits, enable both individuals and organisations across the Eurozone to make payments and receive collections in a consistent way, whether for domestic or cross-border flows. Some corporates are already leveraging the opportunity that SEPA presents to reduce the cost of cross-border payments, and to standardise and centralise payments and collections processing. For many SSCs that could enhance centralisation and reduce costs by migrating to SEPA, the financial crisis pushed SEPA further down the ‘to do’ list. Today, SSCs should be evaluating SEPA and its opportunities, and putting concrete migration plans in place, to take early advantage of its tangible benefits and to achieve migration based on their own priorities as opposed to regulatory deadlines.
The business landscape for SSCs is complex and challenging, but the opportunities to add value to the company through increased geographic reach, range of business activities and efficiency in conducting financial processes are both considerable and growing. With so many opportunities for collaboration, centralisation and automation, it is important to prioritise where the greatest value to the organisation can be achieved. This requires working with a business partner with the experience, skills and solutions to facilitate the SSC’s current objectives and promote its development in the future. Often, SSCs engage with their banking partner too late in this process, without necessarily being aware of the solutions, service and advice that are available; by engaging early and regularly with a bank that has proven expertise, initiatives can be prioritised, cost benefits calculated, and realistic implementation plans put in place based on best practice business processes. Almost every organisation has been shaken during the crisis, but with increased commitment for reinvestment in the business, enhancing competitive advantage and positioning for growth, SSCs have a major role to play.
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