Shared Services: Customer or Partner?

In developing the framework for shared services in an organization, there are different approaches to how the recipients of shared service delivery should be treated.  Are the groups that receive services via a shared service center considered customers or partners?

As customers, the recipients of services ultimately decide if the services they're receiving are worth the price they're paying.  They can continue their relationship with the service center or they can go outside the company to obtain the services if they're better or cheaper.  From the Center's perspective, they are competing against numerous choices in the market and they need to be better, faster and cheaper than the competition.

As partners, the recipients have a great deal more influence in how services are delivered.  They help shape the service level agreements that govern the behavior of both parties.   They are actively engaged with the shared service organization to craft delivery capabilities and cost structures that will enable the business units to remain competitive.  They are not as concerned with comparing the shared service organization to outside suppliers, although they are mindful of what the market is providing and the cost for providing those services.

So which is it: Customer or Partner?  I believe the choice is a false dichotomy.  The truth is that it's both.  It benefits the company overall when the shared service organization and the business units it supports work together to create the right delivery and pricing model.  It works more efficiently when there is on-going dialogue between the parties to ensure that any issues that crop up are solved quickly and that the long-term direction of the service organization is in line with the strategic goals of the business.

Having said that, it's important for a shared service organization to never lose sight of the fact that the business units are in fact paying for the services and that they deserve to have the best service for the lowest possible price.  To approach it otherwise would be to regress to a bureaucratic mentality that was supposed to be eliminated through the move to shared services.  The most successful shared service organizations are the ones who constantly strive for solid service delivery and a competitive cost structure, while simultaneously partnering with the business units to create a mutually beneficial solution.

Choosing a site for a shared service center - Part II

In part one of this series, I discussed the benefits of locating a Shared Service Center at an existing location or facility.  While the majority of companies decide to leverage an existing location, it sometimes makes sound business sense to choose a completely new location.  Here are some of the reasons:

1. Establishing a new identity for your new Shared Service Organization.  At times none of the existing Finance operations are performing significantly better than the others, and none of them are performing at the level of leading companies.  Or maybe there is a fragmented Finance organization due to multiple acquisitions and each one is loyal to their old business units.  Whatever the case, merging the various support groups into a single group and creating a new identity can be beneficial.  Of course, you could do this and still stay at an existing location.  The problem is that there may still be a lingering perception that it really the old Finance group under a new name.   A new and separate location can go a long way towards dispelling that image.
   
   
2. Building in a new region to support organizational expansion. Since the mission of the Finance organization should be to support Operations, it may make sense to go to a new location to support the organization in that area or region.  A couple of years back I had a client that had acquired various businesses in Europe.  Of course, each business came with it's own Finance organization.  They elected to build a Shared Service center in a greenfield location, in this case Budapest, Hungary.  While they didn't have a presence there prior to the establishment of the SSC, a number of variables made it an ideal location. 
   
   
3. Labor arbitrage.  Let's face it.  One of the, but certainly not the only goal of Shared Services is to create a more competitive cost structure.  This could be the compelling reason for not establishing a Center at an existing location.  This could apply to a U.S. company that simply wants to consolidate operations into a single support business and needs to find a lower cost onshore alternative.  This is particularly true of companies located in high cost areas such as the San Francisco Bay Area and the New York and Boston areas.  It could also mean establishing an offshore presence to create a global delivery center.
   
   
4. Tax incentives.  It's no secret that various country, provincial, state and local governments are eager to recruit clean employment like a Shared Services Center.   This can be a powerful incentive when choosing to move to a new location.
   
   
5. Infrastructure incentives by local/regional government.  Similar to tax incentives, many governments will help with infrastructure buildout as part of the overall package.
   
   
6. Requirement for new skills not available in existing locations.  If an SSC needs a specific skill set not easily available in the local market, it may make sense to move to a new market.  More likely, this is tied in with the labor component.  You could almost surely find the skills you need for the right price, but it may be more expensive than is necessary to pay.
   
   
7. Requirement for new language capabilities.  Similar to the skills argument, language skills may be a reason to move to a new location.  I have one client that has an SSC just outside of London and they can handle service requests in 11 different languages.  On the other hand, I had a client setting up a regional SSC in Asia that picked Shanghai, China in part because of the language skills they could find there.

It is certainly less risky to establish a Shared Service Center in an existing location.  When doing so, the company is already familiar with the local laws, customs and languages.  However, there are very real benefits to moving to a completely new greenfield site.  This option should not be discounted simply because it carries higher risk.  If done properly, a new location can reap economic and intangible benefits for years to come.

Choosing processes to move to a Shared Service Center

Although most Finance personnel would agree that moving various processes to a Shared Service Center makes sense, there is often a debate about which processes can be handled by a Shared Serivce Organization  and which one are better kept at the Business Unit level.

The second debate that I current see that's related to the first point is the issue of process complexity.  Most people are comfortable with moving the Accounts Payable function to an SSC, but what about general ledger account reconciliation?  What about Treasury?  Many companies are asking these questions to determine what's right for them.

An article written by Chris Gunning, the Director of Shared Services at UNISYS illustrates this perfectly. The article, which appears on the Shared Services & Outsourcing Network website, is titled The Next Port of Call for Finance SSOs.  Mr. Gunning talks about the process of handing off Finance processes from the Business Unit to a Regional Center, with the goal of evaluating which processes could even move to global processing center.

One process he brings up is that of Receivables Collections.  He notes that there is often resistance to this particular process by the Business Units.  That jumped out at me because in my consulting experience I often encounter the same type of resistance.  Business Units are quick to point out how important it is to be physically close to the customer.  (What, are they running over there with a hard copy of the invoice?).  They point out that people in a remote location can't possibly understand their business and that it's too hard to collect from a central location.  Hogwash, all of it.  I'd be hard pressed to think of an example where it didn't make sense to have some or all of the collection process in a Shared Service Center.

The rest of the article talks about the possibilities of moving up the value curve by adding increasingly complex processes to the Shared Service Organization.  It's an excellent article that is certainly worth reading.

InterContinental establishes new captive service unit in India

While some companies like UBS made news by selling off their captive service units, InterContinental, the large hotel chain, has established a new captive shared service center in Gurgaon, India.  The details are described in an article from the Financial Express. 

Here's an excerpt:

In what will be the first for the country’s hospitality as well as the IT industry, the InterContinental Hotels group, one of the largest chains of hotels globally, has set up a captive centre in Gurgaon. The global service centre will take care of the finance and accounting work for the 4,400-strong hotels chain along with doing business analytics and market research. Though other international hotel chains like Hyatt have outsourcing contracts with IT firms such as Genpact, none of them have their own captive unit in the country.

This center is an example of the move to global centers for certain functions, such as general accounting and accounts payable processing.  It also incorporates analytics, an activity that is increasingly common in regional and global centers.

Reflecting what I've discussed elsewhere in my blog, InterContinental has created a portfolio model for service delivery, choosing to outsource some functions rather than maintain them in-house.

[T]he hotel chain has a diversified strategy in this area, where it has also outsourced some part of the work to BPO firm WNS and also a part of it to HCL Tech.

“We are also about to announce another outsourcing deal with a different IT firm. However, the captive centre offers great value while being a cost saving proposition along with building the hotel’s brand in the country,” he said.

Choosing a site for a shared service center - Part 1

Once the decision to move to a shared service model is made, one of the early challenges is finding the right location.  Since there are a number of factors that go into it, I'll be covering this decision in multiple posts.

In this post, I'd like to address a very fundamental choice.  Will your company locate a shared service center (SSC) in a location where you already do business, or will you choose a completely new location?  Choosing an existing location is considered a brownfield while a new location is considered a greenfield.

There are a number of good reasons to choose an existing location, and in fact this is the most common choice for companies.  Why is it so popular?

1. Ability to leverage existing facilities.  Companies can lower the capital cost of setting up an SSC if there is room in an existing building.  It can also facilitate a faster transition if facilities don't need to be located or built.
2. Ability to leverage an existing location.  Even if an existing building doesn't have available space, it could still make sense to build a facility on an existing site.  The company already operates in that state/province/country and is knowledgeable about all the rules and regulations.  And it may still be possible to leverage other existing infrastructure, such as a parking lot or a cafeteria.
3. Leverage existing management oversight.  The site manager can oversee construction and development of the center until permanent management can be put in place.  They can also help negotiate the permitting and licensing process for that location.
4. Leverage an existing operation that demonstrates best-in-class metrics.  It is entirely reasonable to perform a benchmark study to determine how multiple sites compare to each other and to external benchmarks.  Say your company has multiple accounts payable locations due to acquisitions.  It would be prudent to compare each site to best-in-class metrics and to each other.  If one site has the management and processes in place to perform at a high level, it may make sense to consolidate all operations into that center.
5. Maintain a competitive cost structure.  If an existing facility is in a relatively low cost state/province/country, it may make sense to build on an existing facility.
6. Leverage available labor pool.  An existing facility may already be situated in an area with a large labor pool with the process skills required to set up the center.
7. Leverage available language skills.  All of the required language skills may be available in an existing location.
8. Minimize time to completion.  Using an existing facility or location will minimize the time required to get up and running, and to begin achieving a return on your investment.
9. Maximize your tax advantage.  Your company may already have an existing facility in a very favorable tax environment.
10. Maximize contributions from state/province/country governments.  Similar to tax benefits, an existing location may have a government that is very eager to provide economic incentives such as road and other infrastructure build-out.

These are some of the big reasons why many companies choose a brownfield location for a new shared service center.  In my next post I'll discuss why it sometimes makes sense to choose an entirely new, greenfield location.

Choosing between Captive and Outsourcing

The Shared Services and Outsourcing Network has an interesting article titled "Top Ten Mistakes Made When Offshoring".  It has a number of interesting points but one is the mistake companies make when they are focused much more on the onshore/offshore decision rather than the captive vs. outsourcing decision.  Companies are understandably interested in taking advantage of the labor arbitrage that comes with moving work offshore.  But in their rush to move work, they may make the mistake of choosing the wrong delivery model.

In a captive model, the company essentially goes it alone, building out its office space, hiring staff and managing the center.  At the other extreme, the outsourcing model is handled by another company with the governance (hopefully) retained by the client company.

So what are the challenges around a captive solution?

1.  Unfamiliarity with the market:  Unless a company already has a presence in that market, it can be difficult to navigate the cultural and political environment.  That's why most companies that go the captive route choose a "brownfield" - that is, a shared service site that is usually part of an existing facility.

2.  Turnover of personnel:  Unless a company has an unusually strong brand name (think GE), the churn of personnel could end up being very disruptive.

3.  Lack of management attention: Regardless of the captive vs. outsource decision, company's management must put in place a proper governance function to provide the necessary oversight.  Without the right management attention, many of the benefits in the business case may not come to fruition.

4.  Rising salaries: With a constantly changing world, locations originally chosen for a captive site may not be as competitive as originally thought.  In India, for example, salaries have risen substantially from the time when they were considered a low-cost location.  This can lead to churn in the organization as talent moves from one opportunity to the next (see point #2).

Neither choice - a captive unit vs. a 3rd party outsourcing agreement - is always the right choice; rather, it must be part of a broader strategy in order to choose the right delivery model.

Where in the World are Companies Locating?

A.T. Kearney's annual survey of attractive business locations shows how much the world changes and yet stays the same. Consistent with last year, India, China and Malaysia took the top three tops due to their educated workforce and relatively low wages. The surprise, maybe, is that the United States rose in attractiveness. But don't get too excited. The main reason was the weak dollar which made the U.S. more competitive against other locations.

Poland, the Czeck Republic and Hungary all fell as demand for resources drove up costs. Egypt and Jordan improved their postions as more companies considered the Middle East.

Communicating Change for Shared Services

I was recently presenting a business case for Shared Services as part of a sales pursuit when I was asked a question: "When should we communicate the concept of Shared Services to our employees and that their job may be impacted?"

As in any communication, my response is to be truthful in your communication and give information to your employees early and often.  That doesn't mean you should tell your employees that you're thinking about moving to a Shared Services concept, or that you hired a consulting firm to complete an analysis of the prospect.  It does mean that you should communicate decisions after you have a clear vision and timetable for a move to Shared Services.  Employees will be understandably concerned about their jobs and they need to know what they can expect, even if it isn't pleasant.  It's not only the right thing to do, it makes good business sense.

I once worked for a client that refused to follow this advice.  They had made the decision to establish a pan-Asian Shared Service Center for their Finance processes.  We were hired to develop the future state vision, build out the Center, train the new employees and migrate the processes.  We were as far along as having the new employees shadow their respective counterparts in the soon-to-be-migrated countries and the company still had not made a formal announcement that they were moving the jobs to an SSC in another country. 

People are not stupid.  They know when senior management is being honest and when they're not.  Companies are better off when they communicate change early, often, and respectfully.  When they do so, the chances of successfully migrating processes to a Shared Service Center are greatly enhanced.

Leveraging Shared Service operations in lower cost areas

In building the business case for Shared Services, the ability to move operations to a lower cost area is often a key benefit.  With the move to a global business environment, talented resources are available world-wide to support back-office processes.

Established thinking usually dies pretty slowly, and most Finance programs evolve slowly.  In the typical progression, Finance operations are either co-located or located near the corporate office, typically a larger city.  There are some gains achieved from process standardization and economies of scale, but there isn't a large labor arbitrage.

In the second phase, operations are moved to a lower cost area onshore.  In the US and Western Europe, this will result in some cost savings due to lower labor rates, and for many companies this is as far as they are willing to go.  For some companies, it doesn't make sense to go off-shore as the increased costs of coordination outweigh the benefits of lower labor rates.  For others, however, the potential savings of moving off-shore are too great to resist.

For now, India is still king of offshore locations; however, rising labor costs, fewer available resources, and the increasing attractiveness of other countries like China are cutting into India's lead.  For Europe, Eastern European countries such as Hungary, The Czech Republic and Bulgaria offer solid options for Shared Service operations.

Whether onshore or offshore, lower cost regions can play a key role in reducing the cost structure of Finance.  A thoughtful analysis of the options is integral to building a solid business case for Shared Services.

Quantifying the cost savings of Shared Services

There is one thing you can be sure of when you're building the business case for shared services, and that is the committee reviewing and approving the move to shared services will be looking for hard numbers on the estimated cost savings.  To that end, it's necessary to benchmark your operations to estimate the cost savings.  There are actually two distinct phases: 1) Baselining and 2) Benchmarking.

Baselining is nothing more than quantifying the performance of your current operations.  That means gathering information on both how effective your organization is as well as how efficiently it operates.  Effectiveness measures ask questions such as:

• How quickly do we close the accounting books each month?
• How quickly does it take to distribute financial infomation to the organization?
• How many days does it take to apply cash to open receivables?
• How many days does it take to process a vendor invoice?

Efficiency measures are focused on cost and automation.  They answer questions such as:

• What is our overall Finance cost as a percent of revenue?
• How much does it cost to process a vendor payment?
• How automated are our systems?
• How many FTEs per billion in revenue to we have?

By baselining your current state effectiveness and efficiency, you're now ready to compare yourself to high performing organizations.  Ideally, you'll be able to obtain benchmark information specific to your industry, but even it you can't, using a database with companies across industries is still incredibly useful.  For many back-office processes like general accounting, it makes sense to compare yourself to the best out there, regardless of industry, as there are not that many unique differentiators between companies and industries.  You can typically find this benchmark data either through an industry trade group or through a consulting organization.

Baselining and benchmarking your operations will allow you to quantify the estimated savining you'll achieve by moving to shared services.  And in doing so, you'll have added to the credibility of your business case.

Driving FTE reductions through Shared Services

When developing the business case for shared services, the anticipated reduction in headcount will always be a key point.  One of the primary selling points is that the move to shared services will help the company achieve greater effeciencies and lower cost.  That lower cost is achieved in part through headcount reduction.  Headcount, or full-time equivalent (FTE) reduction is achieved through both process optimization and economies of scale. 

Process optimization is key to creating an efficient shared services organization.  It means that there will be standards around the way things are done to minimize activities that don't add value, such as redundant controls.  It also means there will be a common technology platform that enables common processes.  By optimizing processes through standardization and eliminating or reducing non-value added activities, a reduction in FTEs can be achieved.

The second way FTE reduction is achieved is through economies of scale.  This includes: 1) consolidating numerous part-time resources from various locations to make one FTE and 2) achieving a greater Span of Control so that there are fewer management layers and cost associated with the function.  By consolidating resources from disparate functions and locations, you can eliminate those jobs that are less than 1 FTE.  These are typically the people in remote locations juggling a number of tasks.  Bringing these positions together creates a more efficient organization.

When starting out a business case, it's difficult to look into the future and estimate how much inefficiency can be wrung out of the processes in scope.  That's where benchmarking comes in.  By baselining your current operations and comparing them to high-performing organizations, you can get a feel for the potential cost savings available.  These estimates will become part of your business case.

Tangible benefits of a Shared Service Center

In building the business case for shared services, there will always be a combination of both tangible and intangible benefits.  As I mentioned in my previous post, it's often difficult to sell a proposed shared service center strictly on the tangible benefits as there are usually many projects competing for capital when measured on ROI alone. 

Having said that, it's still critical to properly document the tangible benefits in any business case.  What are some of the major benefits?

• FTE reduction
• Labor cost reduction by moving to lower cost areas
• Consolidation of facilities and related costs as multiple operations converge
• Economies of scale as the span of control is increased
• More efficient spending with vendors as spending is consolidated
• Reduction in working capital required through more efficient operations
• Lower turnover of personnel and reduction in subsequent hiring costs due to greater career opportunities
• Possible tax benefits by moving to special economic zones

In subsequent posts, I'll discuss each of these in greater detail, but the point is that the tangible benefits of moving to a shared services organization are very real.  These cost savings should be carefully documented and positioned as a central part of any business case.

Building the Case for Shared Services

Whenever a company embarks on the journey to shared services, it's critical that a solid business case be built to support the decision.  All too often, however, the case revolves solely around a hard ROI for the investment.  The thinking is basically: "how much do we invest, how much cost can we cut, and how long will it take to have our investment paid back." 

A hard ROI calculation should be part of most investment decisions, but when evaluating the possible move to a Shared Service Organization, ROI cannot be the only metric by which the decision is made.  It's also important to consider the "soft" benefits of shared services.  Ultimately, the case for shared services will be a combination of both hard numbers and soft benefits.  What are some of the soft benefits?

• Creating a scalable enterprise for future growth
• Setting up operations in a region, such as Asia, that is growing in strategic importance
• Creating a career path for employees as a way of attracting and retaining key talent
• Standardizing and Optimizing processes globally to reduce cost
• Enhancing controls and compliance efforts globally
• Improving productivity

Rarely will a shared services business case be justified on ROI alone as it competes against other investment opportunities for capital.  But by combining an ROI calculation with the soft benefits of shared services, a compelling business case can be created that will support the decision to move forward.