Managing Shared Services and BPO through Metrics

One of the cultural shifts that occurs when moving processes to a captive Shared Service Organization or to a 3rd party outsourcing relationship is that managers must reinvent themselves to manage effectively in the new environment.  In a traditional environment, a Finance manager has a number of people under his or her direct control.  They typically reside in the same geographic area, if not the same actual building or floor.  In this environment, a manager can speak directly with their people, receive immediate verbal feedback and read their body language.  All of these inputs feed into the manager's evaluation process to determine if organizational and process goals are being met. 

An organization with a captive SSO or 3rd party outsourcing relationship must learn to manage differently if they are to be effective in governing that relationship.  No longer can they manage by the old rules.  Gone are the days when a manager can "manage by walking about".  There is much less in the way of verbal feedback and non-verbal cues.  In its place, a manager must learn to monitor and analyze metrics to manage processes. 

An effective governance model for shared services or business process outsourcing relationship will incorporate a feedback system that enables the effective monitoring of processes.  These metrics will be focus on both the effectiveness and efficiency of the process.  Of course, these metrics will be tied to the metrics defined up front and embedded into the service level agreement.  The manager's job is now focused much more on the analysis of data and root cause analysis to understand how successfully the organization is executing those processes.

This change does not come easily for many managers.  They have succeeded in their careers because they became very adept at managing by the traditional rules.  As the organizational structure shifts from one of hierarchy to one of influence, a number of the managers may not effectively make the transition.  As part of the change management process, organizations must educate and train managers in the new realities of managing.   They must also provide the monitoring tools and data necessary to successfully manage in the new environment.

Capturing Reporting Dimensions

More often than not, the companies that become my clients have a common problem.  That problem is they're drowning in data but are crying out for meaningful and actionable information.  I'm currently working with a client in just such a position.  A technology manufacturer with a global footprint, this client has an Enterprise application to generate and capture transactional data.  In fact, they have three of them.  What they don't have is a common data repository and common data definitions to accurately capture and tag the data for reuse. 

Best Practice companies are adept at capturing data once and using it repeatedly.  They have also made significant progress on that most cherished ideal - the One Version of the Truth.  The companies that do this invest in the technology - the data warehouse and concommitant tools - to provide the common data repository.  But this alone is not sufficient.  They also excel at governing data with the proper oversight and definitions.  By doing so, they strategically align their defined reporting dimensions with their business.   This way, the various Lines of Business and Geographies  can report and analyze their business in a way that is consistent with the overarching strategic goals of the organization.

Is It Possible To Spend Too Little?

I recently conducted a report out on a benchmark commissioned by a company in the airline industry.  Most report outs are predictable.  We throw up some slides showing how a company performs relative to its peers and to world-class companies.  Almost always, companies are in the 3rd or 4th quartile for expense ratios.  In other words, they spend too much to perform the same activities that world-class companies perform for much less.

In this particular company, however, their expense ratios were practically all 1st quartile.  So that’s good, right?

Not necessarily.  In one particular function, Planning and Performance Management, they appeared to be spending too little.  Yes, they were efficient, but stakeholder feedback indicated they were far less effective than they needed to be.  Put simply, the operations group wasn’t getting the support they wanted from the Finance department. This company, like many in the airline industry, was having a rough go of it.  It would be too simplistic to say that they needed to start spending more money in this area. 

The key point here is that a benchmark only tells a company how they compare with others in a particular process.  It doesn’t necessarily tell the company if they’re spending too much or too little.  That’s a decision for management based on their short-term and long-term objectives.  Benchmarks are useful tools, but they are only tools to aid in intelligent decision making.

Forecasting the Future

In a previous post I discussed the budgeting practices of world-class companies.  In summary, world-class companies look for ways to reduce the time and effort of the annual planning and budgeting cycle, recognizing that a large effort is not efficient for a process that is obsolete soon after it is complete.

In contrast, world-class companies place more effort on continuous planning and forecasting.  Rather than making the planning process a once-a-year event, world-class companies are finding that it is more effective to implement a rolling forecasting cycle, looking out four to six quarters in advance. 

This has multiple benefits.  By implementing a rolling forecast, companies breakdown the artificial construct of a calendar year and look to forecast through the emerging business cycle.  Additionally, the rolling forecast gives companies time to adjust their capital allocation, ensuring that these allocation decisions are based on the most recent market events and opportunities.

One of the challenges I've seen in developing any forecast is understanding the key drivers of expenses.  Too often general or unrealistic assumptions are interwoven into the forecast without any real effort to track down the real drivers.  This has the inevitable and unfortunate result of creating a wide variance between the forecast and actual results.  Not good when you're looking to build confidence with your Board and Wall Street analysts.

By minimizing the effort to create an annual budget and maximizing the focus on continuous planning and forecasting, world-class companies create a mechanism by which they understand the key drivers behind the forecast and are able to respond quickly to new market opportunities through the flexible allocation of capital and human resources.

World-class Companies Downsize Annual Budget Process

I've recently concluded a series of benchmark projects for different companies in different industries, yet they all have a similar struggle.  All of them had annual budget processes that took too long, involved too many budget interations and included too much detail.  Does this sound familiar?  If so, you're not alone.  This is an area that many companies struggle with for various reasons.  While some progressive companies are getting rid of the annual budgeting cycle all together (typically for non-U.S. companies), the process is part of tradition in most companies.  Overcoming this organizational inertia can be difficult.  Additionally, many times manager's bonuses are tied to static budgets.  This also makes it difficult to significantly change the budgeting process.

While most companies haven't dispensed with the budgeting process altogether, world-class companies are working to de-emphasize the process and place more focus on the forecast.  According to one study, world-class companies complete the annual budget in 3.4 iterations instead of 4.2 iterations seen by median companies.  Additionally, world-class companies have 65 line items in their budget vs. a median of 214. 

World-class companies have come to recognize that, while the annual budgeting process has some value, it is inefficient to spend an inordinate amount of time and effort on a process that quickly becomes obsolete.  The key is to slim down the process, focusing only on the key budget line items to eliminate unnecessary detail and reduce cycle time.