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.

Lessons from the demise of the Virtual Fence

An article at Businessweek.com illustrates the dangers of improperly managing a project.  It discusses the challenges Boeing, the defense contractor, and the Federal government had in managing the the Virtual Fence project and its impact on the effectiveness of the proposed solution.  The Virtual Fence was commissioned by the Department of Homeland Security as a test to see if it could be used instead of a physical fence to secure our southern border.  As Business Week puts it:

...critics contend the government didn't get what it paid for with Project 28 (Note: The prototype fence cost the government $20 million). The Government Accountability Office has said the project suffered from insufficient government monitoring and direction. While acquainted with operating war-fighting systems, Boeing knew little about border patrol realities. "The poorly structured contract that prevented the line Border Patrol agents from pointing out obvious flaws and caused an overreliance on contractors has resulted in a system that has been described as providing 'marginal' functionality at best," says Representative Bennie Thompson (D-Miss.), who chairs the House Committee on Homeland Security.

What happened between Boeing and the government is not uncommon in consulting relationships.  Note that the article states that Boeing knew little about border patrol realities and that the agents on the front line were effectively excluded from providing feedback.  While most consulting companies provide competent advice and often specialize in a particular industry or subject, it's also fair to say that they are not experts in your business.    Only you can be the expert.  Consultants bring value by bringing an objective perspective and, often, empirical data.  Ultimately, the goals of a project can only be met and the expected return realized when the consultants and your organization work together to understand the issues on the front line and to craft a solution that addresses those issues.  By doing so, you can dramatically reduce the risk of a consulting engagement and optimize the return on your investment.

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.

India's Newest Challenges

Quick.  Who is India's largest tech services provider?  Wipro? Infosys? Tata?  Turns out it's "none of the above".  The largest provider of tech services in India is....IBM.  Business Week has an interesting article on the challenge of India's largest tech companies to transform themselves from purveyors of relatively inexpensive back-office processes to truly global companies.  While companies such as Wipro, Infosys, Tata, Cognizant and others have focused on every major country except India, companies like IBM and Accenture have been actively building their services to Indian companies. 

The Business Week article puts it this way:

The writing is on the wall: India's vaunted technology companies must upgrade their business model or face dwindling profits and market share. At the annual conference of Nasscom, the powerful Indian software association, currently under way in Mumbai, the buzz has centered on one topic: When will Indian tech companies grow discontented with being no more than happy back-office campers and start behaving more like their global counterparts IBM (IBM) and Accenture (ACN)?

Given India's determination and talent, I'm pretty confident that the country's top companies can move to the next level.  It will be intersting to see how this transformation takes place and over what time frame.

You can read the full article here.

SEC Chairman lays out 2008 agenda

In a February 8th speech to the Practising Law Institute, SEC Chairman Christopher Cox announced his initiatives for 2008.  During the course of his remarks, Chairman Cox noted the increasingly global nature of regulation and emphasized that his agency would work to release a new roadmap that would facilitate the convergence of US GAAP and International Financial Reporting Standards.  This is not a question of "if" but "when".  The other point that the Chairman made was his belief that interactive reporting, his term for the XBRL technology, will become increasingly important.  Interestingly, the surveys I've seen for the CFO agenda puts the implementation of XBRL far down the list of priorities.  If Chairman Cox has his way, CFOs may need to rethink their priorities. 

Below is an excerpt from Chairman Cox's speech:

The same imperatives of ever-faster communications, ever-more-closely linked markets, and truly global competition for capital that underlie our conceptualization of mutual recognition have for several years been driving the project to converge the world's two great accounting systems — U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. Because of the significant progress that has been made in developing IFRS as a high-quality accounting standard — and in light of its rapid and growing acceptance around the world — the Commission last year voted unanimously to take the next step on the SEC's "roadmap" announced three years ago. As a result, foreign issuers can now file their financial statements with the SEC using IFRS, without need of keeping a second set of books under U.S. GAAP.

Then, last August, the Commission issued a Concept Release seeking advice on whether U.S. issuers should be allowed to choose to prepare financial statements using IFRS. And in December 2007 we held roundtables on this subject and heard from more than two dozen experts. The many comments the Commission has received make one thing exceptionally clear: the rapidly growing acceptance in the rest of the world of IFRS as a high-quality accounting standard will make the U.S. GAAP-IFRS convergence project increasingly important for U.S. investors and issuers. In 2008, the Division of Corporation Finance and the Office of the Chief Accountant, led by Wayne Carnall and Julie Erhardt, will formally propose to the Commission an updated "roadmap" that lays out a schedule, and appropriate milestones on which the schedule will be conditioned, for continuing the progress that the United States is making in moving to accept IFRS in this country.

The third pillar of this international strategy — the adoption of a global computer language for the exchange of financial information — goes hand in glove with the concepts of a common accounting language and mutual recognition of high-quality securities regulation. A standard data format for sharing financial statements and other information that is important to investors will facilitate the kind of comparisons among global investment options that investors need. The international movement to employ eXtensible Business Reporting Language for this purpose will let investors easily find and compare business and financial data with the same ease of doing a Google or Yahoo! search today. And it promises to let companies prepare their financial information more quickly, more accurately, and for less cost. In 2008, following years of evaluation and experience through the SEC's voluntary XBRL pilot program, the Commission will consider a rule for the use of interactive data by U.S. reporting companies that will parallel efforts already underway in other countries. David Blaszkowsky, who heads the SEC's Office of Interactive Disclosure, has been an important leader in this initiative.

Factors Fueling the Growth of Outsourcing

The outsourcing research firm EquaTerra has new research on the factors fueling the growth of outsourcing services.  The study cites four primary factors:

• Weak economic indicators:  Although expense reduction isn’t the only driver for outsourcing, many organizations are reemphasizing outsourcing to increase their bottom line
• New functions outsourced:  Buyers are focusing on new and growing areas like legal and knowledge process outsourcing, document and electronic records management, industry specific offerings and knowledge intensive services
• Service provider readiness:  EquaTerra advisors are seeing some improvements in overall service provider capacity, in part driven by improved pricing and contracting terms
• Smaller, more numerous deals:  The outsourcing market continues to evolve with more but smaller deals spread across a greater number of service providers and delivered on a more global basis

There's no doubt in my mind that offshore outsourcing will continue to grow as a result of the desire to reduce costs.  This will be especially true if the U.S. slips into a recession.  The other point made by EquaTerra that confirms my own experience is that companies continue to look for additonal processes to outsource.  It's a natural evolution for companies to look at more complex processes, such as legal and other types of knowledge work, once these companies realized the benefits of their initial outsourcing efforts and become more comfortable with a delivery model that includes offshore outsourcing as a key component. 

China Rising

It's no surprise that China's getting a lot of press lately.  My last post noted a report on the top 50 offshore locations and China was near the top.  A new article in Forbes notes a study predicting that China will be the top destination for offshore activiy by 2011.  What I found interesting is how China is accomplishing this feat.  Through decades of manufacturing experience, China has focused on the following:

• Learning how to interact and meet the needs of foreign clients,
• Understanding project management,
• Upgrading their national English language skills
• Meeting global standards, and
• Establishing global brands

These factors, coupled with a vast labor pool and low costs, are converging to make China a powerhouse in global service delivery. 

You can read the full article here.

Top Offshoring Locations

There's a new study by the consulting firm A.T. Kearney that shows the top destinations world-wide for outsourcing. As you might expect, India and China are numbers one and two, respectively. What's interesting are some of the other names on the list. Brazil came in a number 5; Chile at number 7 and Mexico at number 10. Just goes to show that Latin America is coming on strong in its attractiveness as an outsourcing location.

Here's the link to a pdf of the report.

Use of Electronic Payments Growing

The use of electronic methods of payment for companies is growing, according to a study by the Association of Financial Professionals (www.afponline.org).  An annual survey of electronic payment usage shows that while checks are still the dominant form of payment processing, the use of checks has declined from 81% of all payments in 2004 to 74% in 2007.  The most commonly cited reason for the shift is to lower transaction cost.  Another interesting statistic is that 43% of the companies surveyed are looking to convert their major suppliers to electronic payment formats in the next three years.

Other research corroborates this information.  World-class companies focus on process standardiation and technology integration to increase efficiency and lower transaction costs.  The companies in the survey have been and will continue to look for ways to more effectively deploy technology that will facilite electronic processing, primarly ACH, P-card and wire transactions.

Click here for the full article.

The Role of the Executive Sponsor in Data Governance

One of the key goals of Data Governance is to formalize the accountability for managing information in an organization.  Typically, the problem isn't that there is no one managing data standards; the problem is that there are too many people managing data standards.  I recently had a client that had a very weak Finance organization.  The various businesses controlled most of their Finance resources and had no problem structuring information is a way that benefited them.  This caused many conflicts between the businesses and corporate as there were few common metrics to evaluate performance.  In a well-functioning Data Governance environment, an Executive Sponsor is appointed to formalize the management of information assets.

The Executive Sponsor has overall responsibility for Data Governance.  In some companies such as Yahoo, this role has been elevated to the formal title of Chief Data Officer (CDO).  In most organizations that have a formal Data Governance function, however, the role is typically held by a senior Finance officer from one of the businesses.  This suprises some clients, as they often think that someone from the Shared Service Organization should hold the Executive Sponsor role.  In my experience this is not correct, as it is imperative that the business units take responsibility for the quality of data generated from their organizations.  If the businesses simply throw bad data "over the wall" to the SSO, data quality will never be acceptable.

Another issue that comes up is the role of IT.  My perspective is that IT has an important role in Data Governance, but that their role is to support the Executive Sponsor and related Data Governance committees as they establish standards for and manage information assets.  Data Governance effots led by IT are bound to dissapoint the business units no matter how hard IT works to satisfy them.

In addition to being a senior Finance officer in one of the businesses, the Executive Sponsor would ideally be well-known in the organization, have a history of leading transformation change in the organization, and hold both formal and informal leadership within the organization.

A strong Executive Sponsor for Data Governance is critical to the initiative.  With the right person in the role, a company can manage their information assets in a way that effectively produces value-added intelligence.

Defining the Goals of Data Governance

Companies are increasingly finding that it pays to put a formal governance structure around their information assets.  For too long, companies have failed to put a formal structure around the design, generation and management of their information assets.  In an increasingly global economy, companies are realizing that they must pay attention to information delivery as a compeitive asset.

Data Governance, sometimes  called Data Stewardship, is the process of managing a company's information assets to create and sustain a competitive edge.  In creating a Data Governance program, the first step is to identify the goals of the Governance program.  The impetus for creating a formal program can include:

1. Realigning data governance with the implementation of a new technology.  Many times a new Data Governance structure is required when a company implements a new technology such as an ERP or Business Intelligence system.  These systems will require specific data definitions that must be proactively managed.
2. Realigning data governance with organizational changes.  Management reporting is a dynamic concept that must keep up with the operational needs of the business.  As companies reorganize, it is imperative to identy and manage changes in required management information.
3. Enhancing the quality of existing intelligence without organizational change.  Even in stable companies, it is rare that operational managers have the intelligence they would like to have to manage their business.  World-class finance organizations focus on continuous improvement, and that includes the intelligence they deliver to their colleagues in operations.
4. Supporting compliance initiatives.  Companies must use their information assets to manage compliance efforts, whether driven by external or internal forces.  Data must be managed to efficiently meet these requirements.

These are some of the basic reasons for engaging in a Data Governance program.  In my next Data Governance post, I'll discuss the basic structure of a typical governance program.

Moving to a Single GAAP Standard

An article at CFO.com highlights the sentiments of the FASB Chair to move to a single GAAP standard for both domestic and foreign companies doing business in the US.  And that standard will not be current US GAAP accounting, but rather one based on International Accounting Standards.  An excerpt from the article.

At an industry conference Friday morning, Financial Accounting Standards Board chairman Robert Herz said he expects that U.S. companies eventually will be made to follow a single accounting standard. That standard, he said, would be International Financial Reporting Standards, not U.S. generally accepted accounting principles.

Herz said he is looking for an "orderly way" to get to a single accounting system and that a national plan would be the way to go about it. The plan would consist of timetables, tasks, and education efforts to move American companies off U.S. GAAP and onto a single global standard. "I don't believe in a two-GAAP system," he said.

The FASB chairman said he objects to providing U.S. issuers with an "unfettered choice" between GAAP and IFRS because it undermines his goal of getting to a single standard. The choice may appeal to some companies, he said, but the standards are written for the benefit of investors, not companies.

For the full article, click here.

India Outsources Outsourcing

Here's an article that made me laugh.  The International Herald Tribune has a story about a new outsourcing trend.  Some of the largest outsourers in India, such as Infosys and Tata Consultancy Services, have begun setting up operations around the world to outsource some of their outsourcing work.  Part of it is cost.  Salaries in India have been rising rapidly due to the great demand.  But part of it is about finding the right language and technical skills wherever they might exist.  An excerpt from the article:

One of the constants of the global economy has been companies moving tasks - and jobs - to India, where they could be done at lower cost. But rising wages for programmers here, a strengthening currency and companies' need for workers in their clients' time zones or for workers who speak languages other than English are challenging that model.

At the same time, India is facing increased competition from countries seeking to emulate its success as a back office for wealthier neighbors: China for Japan, Morocco for France and Mexico for the United States, for instance.

Looking to beat back these new rivals, leading Indian companies are opening back offices in those countries, outsourcing work to them before their current clients do.

In an era of globalization, work will continue to be outsourced to the locations that offer the right skills at the right price.  Who knows, maybe even the US will pick up a few jobs.

You can read the full story here.

Mutual Funds Submit Interactive Data to SEC

As I've cited in previous posts, SEC Chair Christopher Cox has been a heavy promoter of XBRL technology, or what he calls "Interactive Data".  It's been slow getting out of the gate.  A trial program to get companies to submit their filings thorugh XBRL only totalled about 30 companies, and most of those, such as Microsoft, have a vested interest in promoting XBRL technology.

An August 21, 2007 press release indicates that some mutual fund companies have begun submitting risk/return data to the SEC through XBRL.  This data will reside in the SEC's EDGAR database and will be available to the public.

An excerpt from the press release:

The Commission voted unanimously on June 20, 2007, to adopt final rule amendments that enable mutual funds to submit risk/return summary information from their prospectuses using interactive data. The risk/return summary at the front of every mutual fund prospectus includes information about a fund's investment objectives and strategies, risks, costs, and historical performance.

All of the new, interactive mutual fund data will be made available to the public on the SEC's online database, named EDGAR, and to subscribers of EDGAR's high-speed data dissemination service. The Commission will monitor how the data can be used to help inform mutual fund investors and will consider whether further steps are necessary to increase accessibility.

Interactive data is powered by XBRL, a computer software language that labels companies' financial and other data with codes from standard lists so that investors and analysts can more easily locate and analyze desired information. The SEC commenced its XBRL Voluntary Financial Reporting Program in April 2005, allowing public companies to voluntarily submit interactive data documents as exhibits to periodic reports and other filings.

Although Christopher Cox and the SEC would like greater enthusiasm for XBRL, this is certainly a step in the right direction.  At some point the SEC may mandate XBRL submissions, but for now companies have the choice to move to XBRL.

I Can See The Credit Card Offers Now

My previous post on China dealt with the challenges around patent infringement.  Here's a story with a slightly more positive spin.  China has put in place a central database with credit histories on 570 million people and 12 million businesses.  This has enabled Chinese banks to improve the credit environment in the country.  Prior to the establishment of the database, banks had no effective way to assess credit risk.  As a result, they typically only granted mortgage loans.

An excerpt from the Shanghai Daily article here:

The databases help commercial banks curb the credit risks by finding out how many loans businesses and individuals are paying off, said Su Ning, deputy president of the bank.

Many commercial banks resumed offering credit loans since 2006 when the database was put into use. Prior to 2006, most banks only offered mortgage loans.

Many defaulters have actively paid back their loans to banks since the central bank announced set up the database, Su said.

The World Bank Group recently made an assessment on China's business environment, concluding that China's credit index grew by one percentage point to four percent after the database was set up, much higher than the average credit index in Asia of 1.9 percent, Su said.

Foreign institutions said one-percentage point growth can drive the gross domestic product up 0.9 percent, Su said.

For the full article, click here.

Institutional knowledge of borrowers' financial obligations and payment history is essential to efficient credit markets.  Reliable borrowers will be able to borrow more easily and hopefully at better rates.  Now, if they can just get the credit card companies to stop stuffing their mailboxes.

At Least It Doesn't Look Like A Yugo

China hasn't exactly been vigorous in the protection of intellectual property rights.  In fact, they have a long history of turning a blind eye to patent infringement.  When China joined the World Trade Organization, they were supposed to step up their prosecution of those who violated  intellectual property rights.

As a recent story in Business Week has it, there's still a lot of work to do.  A Chinese car company is introducing some new models that look suspiciously like some of the models put out by BMW and Toyota.  An excerpt from the article:

The row was sparked by plans by the importer China Automobile Deutschland to present the Chinese cars CEO, UFO and Nobel -- which strongly resemble the BMW X5, Toyota RAV4 and the Smart Fortwo, respectively -- at next month's International Motor Show (IAA) in Frankfurt. If the cars do appear at the show, then German car giants BMW and DaimlerChrysler may consider suing the Chinese manufacturers, according to a report in the German car industry magazine Automobilwoche.

Let's hope that companies like BMW and Toyota are successful in protecting their intellectual property.  In the meantime, this story only serves as a reminder as to how much more work is required to bring China up to international standards.

Offshoring: The Next Frontier

The website E-Week  has an interesting article about recent research into Offshoring alternatives.  They quote IDC research that discusses the maturing Indian market and attractive alternatives.  They note that salaries for some Indian resources are now 75% of their American counterparts, thus reducing the attractiveness of moving work to India.  However other global sites, notably in China, are rising up the list of Offshoring sites.

The article notes:

Companies that are not pulling out of outsourcing relationships altogether are shifting their offshore office to newer and different regions. A report released by the Aberdeen Group on July 2 found that while India remains the leading offshore destination for most companies—especially if cost savings are the primary driving force—both Russian and Asian providers are maturing quickly and sustaining double-digit growth by competing on both price and quality.

Wage inflation and higher attrition issues, as well as a rising demand for technology professionals in India are causing enterprise customers to shift from tier 1 to midtier providers, finds the report, and argues that companies that want to stay ahead should take advantage of multiple offshoring locations across the globe, or multisourcing.

Three Chinese cities are cited in the report: Dalian, Shanghai and Beijing:

Agent skills, political risk, cost of labor and language skills were all factors considered in the IDC report's ranking of three Chinese cities—Dalian, Shanghai and Beijing. These three cities were ranked by IDC as numbers five, six and seven of the top ten locations for global delivery. IDC predicted that Chinese cities could take over Indian ones as early as 2011.

China is working hard to match and exceed India's capabilities as an Offshoring destination.  Through both infrastructure investments, such as the Shanghai International Airport, high-speed rail services and English-language certification programs, China could easily become the region of choice for global service centers.

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.

Will India Dominate Knowledge Processing?

I suppose it was inevitable.  With large numbers of educated, English-speaking professionals, India has already made huge inroads into the Business Process Outsourcing (BPO) market.  Now comes a story from The Times of India about the growing Knowledge Process Outsourcing (KPO).  According to the article, the KPO market will grow just under 40% a year through 2011.   Of the $16.7 billion (US) market by 2001, India would account for $11.2 billion.

You can read the full article here:

http://timesofindia.indiatimes.com/India_to_dominate_global_KPO_market/articleshow/2227383.cms

SEC Proposes Move Away From US GAAP Reconciliation

The SEC currently has a proposal out to eliminate the requirement that currently exists for foreign companies to reconcile their financial statements to US GAAP.  Under the proposal, companies may avoid the reconciliation process if they follow the English language version of International Financial Reporting Standards. 

The proposal is called Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP.  The release number is 33-8818.  Comments are due by September 24, 2007.

While there may be changes to the proposal based on feedback, my guess is this proposal will be finalized in some form.  There is strong momentum behind the idea of moving to international reporting standards.  This will be a key step in that movement.