by Helen Sanders, Editor
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.
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.
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.