9 Factors for Choosing a Shared Service Organization Cost Allocation Scheme

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Shared Services Cost Allocation

Allocating the cost of a Shared Services Organization (SSO) to the business units and departments that the SSO supports is a matter of ongoing debate. There are multiple ways to allocate costs, although none of them are perfect. And certainly, none of the choices will make everyone in the organization happy. However, when considering the cost allocation scheme, it’s important to consider the nine factors below to choose the allocation model that best reflects your company’s goals for Shared Services.

Alignment with Organizational Goals: Ensure that the chosen costing model aligns with your organization's strategic goals and objectives. Different costing models have different implications for cost control, cost visibility, and cost recovery, so it's essential to choose one that supports your broader business strategy.

Complexity of Services: Consider the complexity and diversity of the services provided by the shared services center. Some costing models are better suited for simple, repetitive tasks, while others are more appropriate for complex, variable services. Choose a model that can accurately capture the cost drivers for your specific services.

Transparency and Accountability: Transparency is crucial for ensuring accountability and fair allocation of costs. Look for a costing model that provides clear visibility into how costs are allocated to different business units or departments. This transparency can help prevent disputes and ensure that each unit pays its fair share.

Scalability: Assess whether the costing model can scale with your organization's growth. As your shared services center expands or contracts, the costing model should be flexible enough to adapt without significant disruptions or overhauls.

Cost Accuracy: The accuracy of cost allocation is essential. Inaccurate cost allocation can lead to inefficiencies, cost overruns, and dissatisfaction among business units. Consider whether the costing model can capture all relevant costs and allocate them accurately to service recipients.

Benchmarking and Performance Measurement: Determine whether the chosen costing model allows for benchmarking and performance measurement. This is vital for assessing the efficiency and effectiveness of the shared services center and identifying areas for improvement.

Technology and Data Requirements: Consider the technology and data infrastructure needed to implement the costing model effectively. Some models may require advanced financial systems and data analytics capabilities. Ensure that your organization has the necessary resources and capabilities to support the chosen model.

Cost Recovery Mechanism: If your organization aims to recover costs from internal customers, evaluate how the costing model facilitates cost recovery. Different models may have varying approaches to cost allocation and billing, so choose one that aligns with your cost recovery strategy.

Cost-Benefit Analysis: Conduct a cost-benefit analysis to assess the financial implications of implementing the chosen costing model. Consider the initial implementation costs, ongoing maintenance costs, and the potential benefits in terms of cost control and efficiency.

By carefully considering these nine factors, companies will take a rational, proactive approach to implementing a shared services allocation method.

Odds & Ends in a World of Globalization - 29 August 2023

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Embracing the Power of Outsourcing: Unlocking a World of Benefits

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In today's globalized and interconnected world, outsourcing has emerged as a strategic business practice that empowers organizations to tap into specialized skills, enhance operational efficiency, and drive growth. Outsourcing involves delegating certain tasks or processes to external service providers, allowing businesses to focus on their core competencies and gain a competitive edge. In this blog post, I will explore the numerous benefits of outsourcing and shed light on how it can revolutionize businesses across various industries.

Cost Savings

One of the most significant advantages of outsourcing is the potential for cost savings. By outsourcing non-core activities or functions to countries with lower labor costs, businesses can significantly reduce their operational expenses. These cost savings can be attributed to factors such as lower wages, reduced infrastructure investments, and decreased overhead expenses. Outsourcing also eliminates the need for recruiting, training, and managing additional in-house employees, saving on recruitment and human resource costs. Such financial efficiencies can enable businesses to allocate resources more strategically and invest in other critical areas of their operations. However, while cost is always important, outsourcing has other benefits that enhance process effectiveness.

Access to Specialized Skills and Expertise

Outsourcing opens the doors to a global talent pool, allowing organizations to access specialized skills and expertise that may not be readily available internally. External service providers often possess deep domain knowledge, technical proficiencies, and industry-specific experience. Whether it's software development, digital marketing, customer support, or accounting services, outsourcing offers access to professionals who are highly skilled in their respective fields. This not only enhances the quality of work but also promotes innovation and enables organizations to stay ahead in rapidly evolving industries.

Access to Latest Technology

A compelling reason to choose an outsourcer is that the outsourcing firm typically has access to the latest technology. This can also include proprietary technology unique to a particular outsourcer. Rather than invest the time and money to bring the application architecture up-to-speed, companies can outsource functions and let the outsourcer enable the processes with the latest technology.

Increased Operational Efficiency

Outsourcing non-core business functions enables companies to streamline their operations and improve overall efficiency. By entrusting specialized tasks to external experts, organizations can leverage their expertise and benefit from streamlined workflows, optimized processes, and industry best practices. This, in turn, helps to enhance productivity, reduce turnaround times, and deliver higher-quality outcomes. With outsourcing, businesses can focus their internal resources on core activities, allowing for greater operational agility and a more efficient allocation of time and talent.

Scalability and Flexibility

Outsourcing provides businesses with the flexibility to scale their operations rapidly and efficiently. As organizations grow or experience fluctuations in demand, outsourcing offers the ability to quickly adapt and scale resources up or down as needed. Service providers can accommodate variable workloads and effectively manage peaks and troughs in business activity, ensuring uninterrupted service delivery. This scalability allows businesses to respond swiftly to changing market dynamics and seize opportunities without being constrained by internal resource limitations.

Enhanced Focus on Core Competencies

By outsourcing non-core activities, businesses can concentrate their internal resources and energy on their core competencies. This focus allows organizations to excel in areas that differentiate them from competitors and add significant value to their customers. Outsourcing peripheral tasks frees up time and resources that can be redirected towards strategic planning, product development, and improving overall business performance. This laser-like focus on core competencies enhances competitiveness, fosters innovation, and positions businesses for long-term success.

Risk Mitigation and Business Continuity

Outsourcing provides a robust risk mitigation strategy for businesses. External service providers often have established business continuity plans, disaster recovery measures, and risk management frameworks in place. By outsourcing certain functions, organizations can leverage the expertise of these service providers to ensure uninterrupted service delivery even during unforeseen events or disruptions. Service level agreements (SLAs) and contractual obligations also provide a layer of accountability and ensure that service providers adhere to agreed-upon quality standards and performance metrics.

Conclusion

The benefits of outsourcing are far-reaching and extend across various dimensions of business operations. From cost savings and access to specialized skills to enhanced operational efficiency and scalability, outsourcing empowers organizations to focus on their key competitive advantages rather than being distracted by back-office activities that are better handled by an experienced outsourcing provider.

Keys to Successful Globalization of the Finance Organization

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Successful globalization of the finance organization requires careful planning, implementation, and ongoing management. Here are key factors to consider:

  • Clear Strategy: Develop a clear strategy that aligns with the organization's overall goals and objectives. Define the scope and purpose of globalization, including target markets, products/services, and growth expectations. A strategy of Operational Excellence will require a different type of finance organization than would a strategy of Product Leadership. A clear business strategy will also feed into the location strategy to align global resources with the required finance capabilities.

  • Strong Leadership: Appoint capable leaders who understand the nuances of global finance and can effectively manage diverse teams across different regions. They should possess cross-cultural communication skills and be adaptable to local market conditions. The Sponsor of the globalization initiative is critically important. He or she will be the one to cast the vision for the future state and will provide personnel and other resources to drive the initiatives to success.

  • Standardization and Localization: Establish standardized financial processes, systems, and reporting frameworks that can be adapted to local requirements. Strike a balance between centralization for efficiency and localization to accommodate regional variations. It will depend on the business and the industry, but a good rule of thumb to shoot for is to have 80% of processes world-wide standardized. Exceptions will need to be made for local regulatory and statutory requirements.

  • Regulatory Compliance: Understand and comply with international financial regulations, including tax laws, accounting standards, and reporting requirements in each target market. This ensures transparency and builds trust with local stakeholders. Compliance considerations should be built into the processes and systems. A good example would be structuring the Chart of Accounts to facilitate statutory reporting requirements in each local.

  • Technology Enablement: Digital technologies are a game changer for many companies. Leverage advanced financial technologies to streamline processes, enhance data accuracy, and enable real-time reporting across geographies. Implement robust financial systems and consider cloud-based solutions for scalability and accessibility. Use investments in technology to drive the standardization necessary to drive economies of scale in the global delivery model.

  • Talent Development: Invest in talent development programs to build a globally competent finance workforce. Provide cross-cultural training, offer international assignments, and encourage knowledge sharing among employees from different regions.

  • Risk Management: Develop a comprehensive risk management framework to identify, assess, and mitigate risks associated with global operations. This includes currency fluctuations, geopolitical uncertainties, compliance risks, and operational vulnerabilities. Internal controls are an essential part of the global delivery model. Segregation of duties and other controls should be built into processes as they are designed and updated.

  • Effective Communication: Foster open and transparent communication channels across the organization. Encourage regular interaction between global teams through video conferencing, collaboration tools, and periodic face-to-face meetings to build trust and alignment. In addition to live meetings during overlapping time zones, internal intranets can be used to disseminate information and templates required by teams globally.

  • Local Partnerships: Establish strategic partnerships with local institutions, advisors, and consultants who have deep knowledge of regional markets. Leverage their expertise to navigate cultural nuances, legal requirements, and market dynamics.

  • Continuous Evaluation and Adaptation: Continuously evaluate the effectiveness of global finance operations, monitor key performance indicators (KPIs), and adapt strategies as needed. Stay agile and responsive to market changes and emerging opportunities. Given the rate of technological change, it’s essential to continually review emerging technologies to evaluate the potential to revise and updated the finance operating model.

    Successful globalization of the finance organization requires a holistic approach that considers cultural, regulatory, and operational aspects. By addressing these key factors, organizations can navigate the complexities of global finance and drive sustainable growth.


Challenges of Global Business Services

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Embracing global business services enables companies to drive organizational effectiveness while driving down the overall cost of finance. It also allows companies to outsource, where appropriate, processes which are not core to their competitive advantage while also leveraging technology investments made by the outsource provider. However, global business services (GBS) face several challenges in today's dynamic and interconnected business environment. Organizations need to think through these issues before embarking on the redesign of their organizational model. Some of the key challenges include:

  1. Cultural and Language Differences: Operating in a global context means dealing with diverse cultures and languages. GBS organizations need to navigate and understand these differences to effectively communicate and collaborate across borders. Managing cultural nuances, language barriers, and local customs can be challenging but crucial for successful global operations.

  2. Regulatory and Compliance Complexity: Different countries have varying regulatory frameworks and compliance requirements. GBS entities must ensure they adhere to local laws, regulations, and tax requirements while maintaining global standards. Staying up to date with ever-changing regulations and ensuring compliance can be complex and demanding.

  3. Talent Management and Skill Gaps: Building a skilled and diverse workforce is essential for GBS success. However, finding and retaining talent with the right skill sets can be challenging in a competitive global market. GBS organizations often face skill gaps in areas such as language proficiency, cross-cultural communication, and specialized expertise, requiring ongoing training and development programs.

  4. Technology Integration and Infrastructure: GBS heavily relies on technology to streamline processes, enhance efficiency, and facilitate global collaboration. However, integrating different technologies, systems, and platforms across various locations can be a significant challenge. Ensuring seamless connectivity, data security, and infrastructure scalability are essential for effective global operations.

  5. Data Privacy and Security: Global businesses handle vast amounts of sensitive data, including customer information, financial data, and intellectual property. Ensuring data privacy and security across multiple jurisdictions is a critical challenge for GBS. Compliance with data protection regulations, implementing robust cybersecurity measures, and safeguarding against data breaches require constant vigilance and investment.

  6. Supply Chain Complexity: Global businesses often have complex supply chains that span across different countries and regions. Managing and coordinating suppliers, logistics, and inventory across borders can be challenging due to varying regulations, transportation constraints, and geopolitical risks. Supply chain disruptions, such as natural disasters or political instability, can have a significant impact on GBS operations.

  7. Communication and Collaboration: Effective communication and collaboration are essential for global business success. However, coordinating teams spread across different time zones, languages, and cultures can be a challenge. GBS organizations need to establish clear communication channels, leverage technology for virtual collaboration, and foster a culture of inclusiveness and teamwork.

  8. Economic and Political Uncertainty: Global businesses are exposed to economic fluctuations, geopolitical tensions, trade disputes, and policy changes. These uncertainties can impact market conditions, supply chains, and customer demand. GBS entities must monitor global trends, anticipate potential risks, and develop agile strategies to adapt to changing circumstances.

Successfully addressing these challenges requires strategic planning, strong leadership, adaptability, and continuous learning. GBS organizations that can effectively navigate these obstacles can leverage the benefits of globalization and achieve sustainable growth in the global marketplace.

Latin American Shared Service Centers are leveraging digital technologies

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According to a press release from the Shared Services and Analytics Network, Shared Service Organizations (SSOs) are increasingly using digital technologies to automation their processes and reduce the human footprint in the Centers. According to the release:

  • 29% of Latin American countries are integrating AI Chatbots,

  • 31% are using Artificial Intelligence,

  • 29% are using Machine Learning. SSON data includes how Latin American SSOs are planning to expand the scope of their operations this year by offering new services.

  • Around 40% of Latin American SSOs are also planning to scale down their footprint while they broaden their operations as automation becomes more prevalent.

It remains to be seen if these cost savings will be put back into the business for additional technology or re-skilling of now redundant human resources.

Determining the keys to globalization success

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The complexity of globalization precludes any easy answers when it comes to achieving success for the finance organization. Every finance organization needs to understand the competitive landscape in which it exists in order to position finance as a true value-added partner that understands and provides strategic context around business decisions.

In order to do that, the finance organization needs to incorporate the following seven key lessons to position finance as a truly global organization that provides the capabilities, flexibility, and scalability to drive continuous business value over time. This first post introduces the seven keys. In subsequent posts I’ll expand on each one.

The seven keys to globalization success are:

  • Align finance capabilities with strategic intent

  • Align finance operating model to support strategic capabilities

  • Establish global operating standards

  • Control through a global governance model

  • Develop a global managerial mindset

  • Maintain a global performance monitoring system

  • Create a scalable yet agile organization

Global Business Services is a key design consideration as finance organizations position themselves for the future.