Using Finance & Accounting Shared Service Centers to Deliver Enterprise-Wide Value
Introduction
Martin Boyd. SunGard. Shared service centers (SSCs) have become a familiar concept to many multinational companies. Originally their purpose was primarily cost savings and many have proved very successful in this respect. According to a recent Hackett survey for example, 84% of SSCs had achieved savings of over 11% and 18% had made savings of over 40%. The benefits which a SSC can extend beyond cost savings, however, and it is in these additional areas of value which we see the most significant trends. Finance costs as a percentage of revenue has steadily decreased, processes are being improved and standardized and new technology is being leveraged to create centers of excellence in the organization. So while SSCs used to be seen purely as cost centers, we see them now as value generators.
We see initial sacings by centralizing professional knowledge and making this transferable across our business -JEANNOT J. JONAS
Are your shared service centers (SSCs) seen as value generators or cost centers?
Joe Prudente, Future Electronics. I think the SSC at Future Electronics is seen more as a value generator: we are involved with issues such as securitization and credit insurance agreements. In these areas, we help to drive down costs as we are able to demonstrate that we handle our receivables well. This is considered very positively by the banks and helps us to secure cost-effective solutions.
How is this validated?
Joe Prudente, Future Electronics. We do month-end reporting which demonstrates the cost of capital and other metrics. The improvement in month-on-month performance helps to reduce our insurance costs.
Jeannot Jonas, Goodrich. Personally, I prefer the phrase ‘service center’ over ‘cost center’ as it more closely reflects our objectives. Goodrich is still in the early stages of our SSC development. Our UK SSC, which we acquired as part of the TRW acquisition in 2002, is bringing substantial benefits but we have not yet replicated these in the US. Goodrich has grown through acquisition which has resulted in 35 different ERP systems. We made the decision in 2006 to migrate to SAP globally, hence the greater feasibility of the SSC concept. We see initial cost savings by centralizing professional knowledge and making this transferable across our businesses. As we bring the operations of each of our strategic business units (SBUs) into the SSC, these benefits will become increasingly apparent.
Craig Mondschein, Honeywell. SSCs need to be established as centers of excellence, the benefits of which only start with cost savings. Ideally, the value which an SSC is expected to deliver needs to be ascertained at the outset. At Honeywell, our SSCs are considered cost centers simply because they are not directly revenue-generating. While some occasionally consider the SSCs an impediment by putting in controls around credit and collections, they can save the company a great deal of money. [[[PAGE]]]
As an example, one of our businesses serves the aerospace industry with receivables of $10 million or more. If you can avoid having outstanding receivables from a business which goes into Chapter 11, which could result in receiving only 30c or 50c on the dollar, this means you become a value generator. It only takes one such event in a company’s history to recognize the value of a mature collections process which is consistent worldwide.
Paul Thayer, Monster. We have achieved results by reducing our bad debt expense and improving cashflow, for which we use detailed metrics. Perhaps uniquely, we have two analysts who create and analyze metrics and seek opportunities for improvement. We constantly communicate these findings both to the businesses and to the CFO. In this way, we become a valuable partner to the business.
In North America, the SSC was established six years ago. As a result of its success in metrics reporting, we are replicating our US model, including the technology, processes and metrics across to our European SSC. As a business, we do not yet resemble a global operation to the same extent as the other panelists, but we will be in the next few years. In some areas, such as payroll and T&E, we have already centralized our operations globally through Milwaukee.
How do you create the perception within the organization that the SSC is a strategic, not simplyyan operational function?
Paul Thayer, Monster. In reality, the SSC can’t promote itself enough. For example, we used to receive the cashflow forecast from Treasury which bore no relation to the SSC’s activities. We have since taken over this function as we are closest to the underlying numbers and are in the best position to identify trends and patterns. Without constant promotion and engagement of what the SSC can do, we would not have been able to provide this further service to the company.
Craig Mondschein, Honeywell. The linkages between the SSC and the business are very important. For example, if Credit & Collections misses its DSO or past due numbers as a result of unbilled amounts or incorrect invoices generated by the business, who owns this problem? If the business owns the invoicing process and DSO is the responsibility of the SSC, the outcome goes against the SSC but the cause is rooted in the business. You need to be clear about where responsibilities lie, have the ability to conduct a root cause analysis and be in a position to address problems.
Communication and collaboration would seem to be vital. If you can’t collaborate effectively, it’s difficult to execute the strategy. Without clear communication, business units are frequently concerned about service levels and visibility. How have you gone about addressing these issues?
The linkages between the SSC and the business are very important -CRAIG MONDSCHEIN
Paul Thayer, Monster. I have been through two SSC integration processes in different companies. My watchwords in both cases have been Communicate, Listen, Respond. Everyone needs to be clear about what you are doing and you need to show you’re listening. We used Service Level Agreements between the businesses and the SSC which, it should be remembered, work both ways. On the technology side, we use SunGard’s AvantGard Receivables which provides a wide range of analytical capabilities so we can identify the root cause of problems. This is vital feedback for the businesses. We make sure we meet with senior personnel at the business units regularly and maintain our visibility.
Success breeds success - business units see what has been achieved elsewhere in the organization and then look forward to joining the SSC. Demonstrating these successes is vital in being seen as a value generator. [[[PAGE]]]
Craig Mondschein, Honeywell. We have four global businesses groups. If you centralize operations and performance worsens, there are going to be complaints, so it needs to be done properly. We have changed our compensation structure for senior executives to include working capital, so management pays more attention to payables and receivables. The result of this, however, is that Honeywell created Centers of Excellence within each business group so that the executives can be responsible for the working capital upon which they are being measured.
Jeannot Jonas, Goodrich. At Goodrich too, senior management is compensated on working capital and cashflow. This does create a conflict as while they can participate and create the right behaviors and priorities, they cannot control what they are measured on.
What’s the solution to this?
Jeannot Jonas, Goodrich. Inevitably it’s quite difficult. You need to keep the communication channels open both to the business units and with the CFO and CEO. Senior executives need to be on board to make it work. In the early stages of an SSC, it is up to the business units whether or not they participate; if the SSC has demonstrable results, however, realistically there is no choice but to do so.
Joe Prudente, Future Electronics. Since we have centralized, we deal with both internal and external customers. Initially, there was some hysteria amongst the sales people, of which there are 2,000, who were reticent about centralization. We wrote service level contracts with tough metrics, such as 30-minute credit decisions, 30-minute call return etc. which we published and sent to the sales managers. This built credibility with the sales team, and although there were inevitably some teething troubles, these eased over the first few months. Over time, the sales people recognized that there was no need for the credit controllers to be next to the customer.
Language is important but cultural issues are perhaps more significant -JOE PRUDENTE
Ultimately, you need to be both a politician and a sales person, understand expectations and manage them. The objectives of the business are the same in the sales force or in the SSC: we are a distributor, without unique products of our own. Customers therefore have a choice about their business partner so we need to do business better than our competitors and keep our customers happy.
Martin Boyd, SunGard. I have been surprised at the lack of formal SLAs which exist in many organizations between the SSC and the business. It would seem to be imperative to have a credit process which works consistently across all parts of the business, across all regions and timezones.
Craig Mondschein, Honeywell. An important point for any centralized environment is to remember that business units are your customers whom you need to treat in the same way as external customers.
Jeannot Jonas, Goodrich. This is one of the biggest challenges when hiring new people into the SSC or other centralized environment: to emphasize the focus on internal customers as much as external customers. This needs to be reinforced continually to both new and long-standing staff.
Martin Boyd, SunGard. So to summarize: companies need a mandate across the organization for collaboration. They need to treat business units as customers and deliver value to them to gain their respect. Minimizing errors is one way in which a SSC can do this and world-class organizations have a very low incidence of errors through constant refinement of business processes and a strong technology solution. World-class companies have demonstrated that leveraging technology is vital to achieving automated, efficient order-to-cash (collections) and purchase-to-pay (payables) operations.
How does the panel deal with issues of language and geography in a centralized environment?
Craig Mondschein, Honeywell. We have established Accounts Payable (AP) and Accounts Receivable (AR) operations by region: Prague, Mexico City, United States, China, and India. In some locations, such as Prague, there are impressive multi-lingual capabilities amongst the workforce. Mexico City manages Latin America and some US operations. Where language issues exist we can recruit a language specialist, manage AP and AR in-country or transfer responsibility to another region.
Jeannot Jonas, Goodrich. We are less diverse geographically and operate in an English-speaking industry. Where necessary, we use people in-country to deal with local issues. Language is as important as local expertise: when you are not dealing in your native language: there can be a lack of clarity in communication and a lack of sensitivity to the nuances of language, particularly in a delicate area such as credit. [[[PAGE]]]
Joe Prudente, Future Electronics. As an English-speaking industry, around half of our staff use English as their second language. Language is important but cultural issues are perhaps even more significant. To address these, we place people across regions. It’s very difficult to centralize completely in Europe and Asia where the cultural issues are more diverse. While we use AvantGard Receivables as a common platform and apply consistent processes, we modify collection letter templates etc. to be sensitive to cultural nuances of different regions.
Paul Thayer, Monster. Language and cultural issues don’t have a major impact on us. You need to work out which battles you need to fight. We tried to centralize our receivables across North America, but this caused problems in French-speaking Canada, so we retain some staff in our head office in Montreal.
What are the critical success factors in the transition to a shared services environment?
Craig Mondschein, Honeywell. IT infrastructure is probably the most important piece of the puzzle. Honeywell, for example, has evolved through acquisition resulting in many systems and levels of sophistication. Honeywell today is in the middle of standardizing our IT infrastructure globally. This IT centralization and rationalization is important so that you are in a position to add value to the business. The value-add includes moving people around the world interchangeably, which is positive in a number of ways, not the least of which is disaster recovery and staff motivation.
Business unit engagement is also vital which can be achieved by clearly communicating successes -PAUL THAYER
Joe Prudente, Future Electronics. It took us four or five years to standardize onto a global platform but it has been very effective and acts as the engine to drive all other processes. It enables us to understand our global credit position with a client, not just within each country.
Craig Mondschein, Honeywell. When you have clients who buy from different businesses which have historically used different ERPs, it is very difficult to see a global position without a centralized infrastructure.
Joe Prudente, Future Electronics. Exactly. We might also be dealing with different business units of the same company. Using a central infrastructure, we can allocate a single resource and make one contact with a client to address all the various credit items, rather than multiple individuals contacting the client repeatedly. This greatly improves our efficiency, visibility over global credit and in particular, the customer experience. Bulking receipts then also reduces transaction costs.
Paul Thayer, Monster. Business unit engagement is also vital which can be achieved by clearly communicating successes. For example, we needed to integrate 26 different business units. After the first ten or eleven, the others were fighting to be next. Throughout this, particularly during the early stages, a management sponsor needs to have an iron commitment to the SSC model.
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How do you motivate staff in the SSC?
Paul Thayer, Monster. We have scorecards both by individual and by team linked to a bonus program. These scorecards illustrate performance history and rankings etc. which while they are not made public, allow individuals and their managers to receive feedback and gauge progress. We also have small bonuses and informal recognition on an ad hoc basis as well as formal bonus programs. Management need to talk to people, not stay shut up in an office, and create a positive and enjoyable working environment - jeans days, Hallowe’en costumes etc. can all help! When Monster’s SSC won the Alexander Hamilton Technology Award in 2006, there was an entire week of celebration!
Joe Prudente, Future Electronics. We tend to emphasize the ‘big picture’ of what the department is trying to achieve rather than focusing on the number of individual calls etc. to encourage professionalism and staff development. We have a bonus program, although this is a modest part of overall remuneration to encourage good behaviors, which we link to departmental rather than individual goals such as the proportion of aging invoices.
Craig Mondschein, Honeywell. We motivate staff using peer awards as well as those determined by management - people really value recognition by their colleagues.
What have you done to facilitate communication both up and down the organization to allow centralization of cash processes, or what might you have done differently?
Jeannot Jonas, Goodrich. We have maintained a constant dialogue with the SBUs but also upwards. The CFO relies on the cashflow forecast which we do each month based on a bottom-up approach. This is then reviewed by the segment controllers and then by the businesses. This encourages buy-in and accurate input from all parties. We’ve had to learn the hard way in some of these areas but that’s not necessarily a bad thing.
Craig Mondschein, Honeywell. At Honeywell, one of our five initiatives is Cash - every employee knows that cash is an initiative and is expected to make this a part of his/her job every day .
