Published: September 01, 2009
Establishing shared service centres (which to avoid repetitive strain injury, I will refer to as SSCs) for centralising financial activities such as payments and collections is often a desirable activity from a shareholder’s perspective; however, their introduction can inevitably result in concerns and dissent amongst other parts of the business, where local responsibility may appear to be eroded and business functions moved to remote locations. From a treasurer’s point of view, centralising financial processes should bring a variety of benefits in terms of financial supply chain management, working capital optimisation and forecasting. In fact, treasurers should be closely involved in all aspects of a SSC migration, from developing the business case through to planning its activities, establishing technology and bank connectivity through to full migration. Without close integration between treasury and a financial SSC, many of these potential benefits are lost. In some companies, the SSC is part of treasury; in others they work in tandem; in others again, there is little or no interaction between the two so treasurers are losing out on leveraging these benefits, and failing to take advantage of shared objectives.
SSC backgroundEarly SSCs
Shared service centres are nothing new for many large organisations. During the 1990s, US multinationals were pioneers of the SSC concept. The centralisation of business processes such as accounting, HR and, to some extent, accounts payable went hand-in-hand with system consolidation and rise of the ERPs; in many respects, one trend has driven the other. Many SSCs have achieved dramatic cost savings by reducing headcount and IT costs, creating economies of scale with their banks and other third party providers. However, while a large proportion of readers will have SSCs already established in their organisations, there is still a great deal of potential for expansion both in the number of companies which set up SSCs and in the range of processes which they cover. The crisis has fuelled the business need for efficient, consistent and transparent business processes as well as making it more difficult for finance managers to invest in shared services projects; however, the benefits and return on investment can be considerable.
SSCs location
Despite budget difficulties, however, many banks are reporting that the profile of companies setting up SSCs is expanding, with companies of all types looking at SSCs for processes such as accounts payable and receivable. The location of new SSCs is also changing. Early SSCs were often located in high-cost countries such as Singapore, Hong Kong, UK, Ireland, Netherlands, Belgium and the United States. The next generation then witnessed the ‘offshoring’ effect, with many companies choosing to locate their SSCs on the Indian sub-continent and in China. Today, while all these locations remain popular, many SSCs are looking at regions such as Eastern Europe where the cost structure is quite favourable, language skills and education levels are high and tax incentives exist. Often these can be linked to production sites which companies have already set up in the region.
Banks are reporting that the profile of companies setting up SSCs is expanding.
In Asia, although new locations are developing for SSCs, the English language hubs, such as Singapore, Hong Kong and Manila continue to be popular even though the cost base is higher than it is in alternatives regions. For example, Singapore continues to be a popular location for SSCs and regional treasury centres, with 40% of SSCs in Asia based there. This trend may seem counter-intuitive, but although these regions do not have the cheapest cost base, they have the necessary infrastructure and skills to support SSC operations. China and India are also proving important locations from both cost and strategy perspectives. Many companies, including the banks themselves, are setting up SSCs in China and India as a way of training new personnel, developing new skills and an awareness of company culture, who can then take on different roles in the organisation. We spoke to a SSC expert who has experience in multiple SSC implementations but preferred not to be identified as his current project is at a sensitive stage. He explains,
“The choice of SSC location is an important consideration and will be based on a variety of factors. Companies primarily seeking cost reductions will naturally lean toward low cost locations; others may prefer to site a SSC away from the company’s headquarters to avoid it being seen as part of the head office infrastructure, or at an existing location. The two most important factors in selecting a location are: i) access to sufficient resources with the necessary language and accounting skills to support the business units effectively; and ii) connectivity with the company’s financial systems, both in-house and banking systems.”
Some companies are also splitting larger SSCs across several locations, with a regional SSC in Singapore, for example, and distributed operations in China etc. Conversely, there is a limited trend towards setting up global SSCs, although these still have only minority appeal, with most companies preferring to remain with regional ones, not least due to language, cultural and time zone issues. Even where global SSCs do exist, they are often split by function, such as accounts payable and accounts receivable located in different regions and providing back-up to each other.
New generation SSCs
While cost reduction was an initial driver for many SSCs, the objectives have expanded to include strengthening compliance, managing risk in the (physical and) financial supply chain and enhancing working capital. Since the crisis, these factors have become even more significant. For example, by ensuring greater visibility over cash, control over payment timing, reduced operational costs and faster collections, the impact on working capital can be considerable. Regulation is an important related driver, since the implementation of Sarbanes-Oxley in the United States and similar legislation in other parts of the world, such as JSOX in Japan. Companies originally embraced shared services for the cost savings, which can be substantial as they eliminate the duplication of transaction-processing efforts across an enterprise.[[[PAGE]]]
It is in the interests of the business as a whole, and indeed particularly of treasury, that the SSC is a success, in order to achieve working capital, forecasting and financial supply chain optimisation objectives. However, success of a major project that has implications for a potentially large number of individuals, technology, business culture and bank, supplier and customer relationships is by no means guaranteed, and significant attention needs to be given to addressing the internal and external challenges along the way, including:
Too much focus on cost reductions at the expense of service quality
With the mantra of ‘centralise, centralise’ in mind, it can be easy to lose sight of what is required to deliver high quality services and maintain business effectiveness. A SSC is so-called for good reason i.e., it is there to provide service to the business, and this is its primary function, not simply to create cost savings. Our SSC expert outlines,
“While reducing costs may be the original objective for implementing a SSC, the benefits need to build year on year. Therefore, there may be substantial cost savings during the first year, but the SSC needs to continue delivering additional value, such as achieving consistency and quality in accounting processes, enabling finance managers to spend less time on routine, lower-value tasks and more time on the high-value activities and business support for which they are qualified. We have also placed a lot of focus on internal controls and establishing a robust segregation of duties which, even with standard systems and processes, can be hard to achieve within smaller finance teams at the country or business unit level. In addition, greater commonality of systems, consistency of processes and improved controls will result in better and more consistent reporting.”
Failing to understand and redesign underlying processes before consolidating functions
Companies are divided in their view of whether to redesign processes before migration to a SSC, as part of the process, or once the migration has taken place. The later that business processes are reviewed and revised, the less likely it is that such a project will ever happen at all, so the SSC does not deliver the efficiencies that were expected. Reviewing, revising and investing in business processes, and the technology to support them, is often critical to success. Our expert urges pragmatism, however, emphasising,
“In an ideal world, business processes which are migrated into a SSC should already have been optimised; however, project timelines often necessitate a more pragmatic approach. Most projects therefore include elements of both, with some processes being re-engineered before or during the migration and others at a later date. However, continuous process improvement, standardisation and automation are essential at all stages of the SSC lifecycle to ensure continued efficiency gains.”
Underestimating the planning and effort required to overcome cultural and other barriers
Implementing change across embedded cultures and managing the transition to shared services is a formidable task in many organisations. There needs to be a sound appreciation from the beginning about the impact of a SSC on individuals, which needs to be clearly communicated.
Payables and receivables are two of the key growth areas amongst SSCs which can have a direct and tangible contribution to the business.
Limitations in scope
It is difficult for a SSC to deliver working capital improvements, for example, if it is only in a position to control part of the process e.g., if payments are centralised but collections remain fragmented and inefficient, only a degree of benefit can be obtained. While these functions may not be centralised into the single centre or location, there should be a holistic view across all the factors that contribute to the financial supply chain, from supplier to customer, including purchasing, trade, treasury, accounts payable and accounts receivable.
Payables and receivables are two of the key growth areas amongst SSCs which can have a direct and tangible contribution to the business. Payments are core to most SSCs and are often the starting point when they are first set up. Strategically, receivables are becoming more important by setting up a centre of excellence for more timely reconciliation, better end-customer service, improved dispute management and greater transparency.
Lack of objective measurement
SSCs generally have Service Level Agreements (SLAs) in place with business units to define performance expectations, but these should be active discussion documents rather than dusty documents in a drawer. SLAs should be monitored regularly through KPIs (key performance indicators) to which staff performance is linked. However, these need to be aligned across the business; for example, if a business unit sends invoices to the SSC for payment, both the invoice transmission and the payment process should be subject to performance monitoring. Performance measures should be straightforward so that the emphasis can be on service rather than monitoring service, and need to be accompanied by periodic service reviews between the SSC and business units to ensure that objectives and expectations remain aligned.
Over-rationalisation
Many companies fail to retain key specialists as they centralise operations into a shared services model. There can be various reasons for this. In some cases, companies do not budget for bonuses to retain key staff during the transition from local finance departments to the SSC, resulting in a loss of expertise and lack of trained staff to support new personnel in the SSC. In others, there is little or no transition period and/or there is no continuity of staffing between the previous business organisation and the SSC. Our SSC expert explains,
“There are two elements to this: managing the expectations of those staying with the company and those who will be leaving as a result of the SSC migration. Both are equally important to the success of the project and clear communication needs to be given. For those staying with the business, they will tend to take on higher value activities, so this communication is not too difficult. For those leaving, it is vital to communicate clearly and consistently, and be open and honest about the impact on each individual. The continued engagement and motivation of these staff is critical to ensure the knowledge transfer that is critical to the success of the project. A company may consider ‘migration bonuses’ linked to each employee’s contribution to successful migration, and career guidance and time off for interviews help in securing positive co-operation and support during the critical phase of the project.”
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Technology is the common layer which can connect both business units and the SSC, and ensure transparency across the business, as well as providing the functionality required to perform each of the SSC’s functions. As we have already outlined, the potential benefits of a SSC, together with treasury, are greatest when a holistic view of working capital and the financial supply chain is taken. This should also be reflected in the way in which technology is used. SunGard, for example, has developed the concept of the financial ecosystem which encapsulates the entire cash flow cycle. While a SSC, and treasury, are likely to use a variety of tools, there needs to be access to a consistent view of data by senior management, business units, treasury and the SSC so decisions are based on common assumptions.
To give one example, treasury can improve its strategic decision-making by using cash flow data and intelligence on trends and customer behaviour from SSCs, in areas such as cash flow forecasting and tranching, liquidity management and investment management. Indeed, treasurers often cite their inability to perform cash flow forecasting and effective liquidity optimisation because they lack this information. In some cases, there is a file transfer between the SSC’s systems and those of treasury but rarely do these discussions go further. This lack of communication would appear to be a major flaw in the integration of information and insight about customer behaviour and cash flow dynamics within the business. There would seem to be two reasons for this: firstly, the inadequate use of technology in some SSCs and secondly, the lack of data integration with treasury.
Banks need to provide support in relevant countries irrespective of the location of treasury or the SSC.
One way in which some companies are addressing this is to take an integrated approach to systems for payables and receivables as well as treasury, and in the future, this is likely to extend too to purchasing, trade finance and other financial supply chain activities. This is becoming increasingly feasible as some TMS vendors, such as WSS, have integrated payment hub tools with their treasury solutions, and SunGard is a provider of working capital solutions. This gives treasury a comprehensive picture over the cash flow dynamics of the business, to enable strategic decision-making, without necessarily taking day-to-day responsibility for payables and receivables.
Another way of addressing this dilemma is that treasuries themselves are becoming the ‘centres of excellence’ for payables and increasingly receivables, by developing payment and/or receivables hubs, also known as payment/receivable factories. At first, it may seem counter-intuitive for treasury to take responsibility for payables and receivables. After all, treasury is focused on high value activities, with relatively low volumes, risk management and other strategic activities. Shared services, on the other hand, typically focus on the efficient processing of low value, high volume activities, which would seem be a more logical ‘home’ for payables and receivables. Centralised treasuries have already taken on some important processing tasks, such as in-house banking and intercompany netting which often includes providing technology to business units or SSCs. Every company is different, however, according to the business drivers, organisation, geographic scope and culture. Financial supply chain management is becoming a more significant activity and consequently, it may often make sense for treasury to take on these functions by providing an oversight across all the cash flow related elements of the business in order to improve decision-making.
Systems infrastructure is one vital element of ensuring that the individual functions, and the sharing of information between treasury and the SSCs is coordinated; a cohesive approach to banking relationships is another. For example, some of the important requirements that banks need to satisfy in a shared services environment include:
As treasury typically ‘owns’ the banking relationships and bank connectivity, there can be good reasons for taking responsibility for payments and in an increasing number of cases, collections. What is increasingly clear to many organisations, wherever these functions are managed, is firstly the value of centralising these functions. Secondly, treasury, accounts payable and accounts receivable are interconnected parts of the financial supply chain and as such, decisions over banking relationships and solutions need to embrace all three areas. These synergies can also be extended to banking connectivity, by routing banking communications through a central channel, such as SWIFT. Having implemented an integrated systems environment, additional tools such as liquidity management, forecasting and management reporting tools can then be used more successfully.
Continued centralisation, the availability of technology solutions which span the financial supply chain, new opportunities for rationalising banking connectivity and a strategic focus on working capital optimisation have meant that the objectives and activities of a company’s SSCs and treasury are converging. There are potentially issues with this in some organisations as the boundaries blur, but there are limited functions where the responsibilities of a SSC and treasury overlap. In these areas, notably accounts payable and accounts receivable, treasury has the opportunity to drive company strategy by taking an early lead in payables and receivables initiatives, or it can influence these at a strategic level. This can include conducting banking relationships on behalf of the group, acting as the technology and banking connectivity hub and helping the business with credit terms in order to optimise working capital.
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