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.

Rethinking the Finance cost structure

As a result of the economic downturn, Finance organizations are rethinking the way they structure their service delivery model.  Specifically, CFOs are evaluating their cost structure to determine what fixed costs can be transformed into variable costs.

In a growing market a fixed cost structure is popular.  A Finance organization with a high fixed cost structure can be very productive, limiting the growth in costs (i.e. adding a few FTEs) as the company grows revenue.  However, in a down market, these same fixed costs can quickly eat into the company's profits.

As we've seen all too well, companies can lay off people and they do, but the continuing cycle of hiring and firing is leading CFOs to evaluate new models.

One model is to outsource specific functions to a 3rd party service provider.  This provider can be onshore or offshore, but realistically, the cost savings by moving offshore are pretty compelling.  As a result, we have seen and will continue to see a growth in the oursourcing of various Finance functions.  This is certainly true for transactional activities such as accounts payable, but also extends to more complicated processes such as the monthly accounting close.

Another option that is gaining steam is the outsourcing of almost the entire Finance function, save certain governance-type positions such as Controller.  The recent sale of banking giant UBS' captive shared service center to Cognizant is one such example.  This was a relatively quick way for UBS to convert their fixed costs into a variable cost. 

 As CFOs become more comfortable with this type of delivery model, we should look to see it grow even when the economy recovers.  Many companies will have learned from this economy that it pays to have a flexible delivery model and a flexible cost structure.

Genpact Wins Five-Year Contract From AstraZeneca

Here's a brief article from the Wall Street Journal about another Genpact win.  Genpact will now handled the Finance and Accounting functions for AstraZeneca.

What I find particularly interesting is that this deal will deliver F&A services to over 50 countries in which AstraZeneca operates.  Another interesting fact is that Genpact's F&A practice is serving over 80 global companies.

NEW (Dow Jones)--Genpact Ltd. (G) has won a five-year contract to provide financial and accounting services for pharmaceutical company AstraZeneca PLC globally, the Indian company--listed in the U.S.--said Thursday.

Under the contract, Genpact aims to increase the effectiveness of AstraZeneca's finance and accounting processes, as part of the pharmaceutical company's initiative to reduce costs, Genpact said in a statement.

The multi-million dollar contract will deliver services to over 50 countries, it added.

The contract will further expand Genpact's client base and broaden its experience in the life sciences industry, the company said.

Genpact's finance and accounting practice currently supports more than 80 global enterprises--including five pharmaceutical and two life sciences companies.

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.

Extreme Insourcing: U.S. Edition

As companies who have previously outsourced call center work to low cost countries find it harder to identify additional cost savings, they're asking their partners to help generate more revenue through add-on sales.  As a result, some companies are looking to hire older, more experienced U.S. workers who can work out of their home.  The thinking is that these more experienced workers will be able to generate more revenue even though they cost more to employ.

An article at Portfolio.com puts it this way:

Companies, having cut as much cost as they can, are looking to us to help grow the top line,” said Judi Hand, chief marketing officer of TeleTech Holdings Inc., an international outsourcing company. “That may be the thing we’re seeing the most of.”

The trend is leading outsourcing firms to grow aggressively again in the United States, after a decade in which call-center jobs migrated offshore by the thousands.

Instead of adding new call centers in low-cost cities and towns, clients are asking outsourcing companies to use “virtual” call centers employingolder, more experienced operators working from home.

High-value customers’ calls are increasingly staying in North America, where costs may be higher than offshore, but at-home operators can generate revenue. Simpler and lower-value tasks, which don’t present sales opportunities, are being routed to offshore operators in larger numbers than ever.

This makes me wonder if any Finance activities would be up for extreme insourcing.  The only activity that quickly comes to mind is receivables collection activity.  With internet access, document imaging and workflow, and a dedicated phone line it isn't too much of a stretch to think these calls could be made out of the home.  I do think most other activities would be better handled out of an office location. 

I think the real barriers are organizational and cultural.  Many Finance activities are so integrated that it makes sense to have some level of critical mass at a single location.  Add in a layer of management and controls, and it doesn't seem likely that many Finance activities are heading for the home office any time soon.

Managing talent in down times

It's been my observation, for companies I personally worked for in industry as well as consulting clients of mine, that performance feedback goes out the window during recessions.  It's easy to give feedback during good times when raises are relatively high.  During these difficult times, it's more important than ever to make sure you're taking care of your best employees.  These are your "A-players" , the ones you want to nurture and grow.  And it isn't always about money.

If money is the only thing you're using to motivate your employees, I suggest you reevaluate the way you're motivating your employees.  Although money and benefits are important to most people, I believe that you're A-players are motivated by more than just money.  So, what are some of the ways to motivate and encourage your best employees (not to mention all the others) that don't cost money?

1. Encourage your employees.  Yes, I know this seems basic, but I can't tell you how many Finance departments I've been in where there seems to be little encouragement.  In these uncertain times employees want to know that their contributions matter.
2. Offer a vision.  Employees want to know your thoughts about charting these rough waters.  Where are you going as a Finance department?  What do your employees have to look forward to?  How are you going to be a better group as you emerge from this recession?
3. Give your A-players meaningful assignments.  Not just what they do on a daily basis, but special projects.  A slow moving economy is the perfect time to look at the way you do things.  Work on eliminating non-value added activities.  I realize in many departments staff have been laid off so there may not be much excess capacity, if any.  But projects don't have to be huge.  They can  be small, incremental process improvements that make you more efficient.
4. Rotate your A-players through other groups.  Expanding their skill sets is a great way to motivate your best employees.  You might be thinking you can't afford to lose them in their current job.  Maybe so, but if you don't look out for your best employees now, they may very well leave when the economy improves.

Motivating employees should be about much more than money.  Make sure you set challenging but realistic goals in their performance plans and continue to push them to become better accountants, analysts, Treasury managers or whatever their job is.   Be honest with them about what's happening and cast a vision of the road you're taking to become a better Finance organization.  By doing so, your group will emerge as a more effective and efficient partner to your business.

Success factors in Finance & Accounting Outsourcing

FAO Research, an independent research firm focused exclusively on the FAO and procurement outsourcing markets, has put together a list of criteria that companies have used to achieve success in their Finance & Accounting outsourcing models:

Working with a Sourcing Advisor Upfront: Four of 10 nominees for our 2008 FAO Awards involved sourcing advisors’ guidance that enabled the prospective customers to have a methodology and processes in place that could lead to successful provider selection, and contract, and manage expectations. 

Effectively Creating and Demonstrating a Future State: Customers with an FAO 2.0 mindset upfront understand that their engagement is being initiated for more than pure cost-cutting reasons, and that a focus on FAO could help them achieve long-term goals as opposed to short-term wins. 

Multiple Supplier Service Delivery Locations: The geographic diversity of FAO service providers’ delivery centers is of extreme importance to FAO customers, as they understand that having access to similar cultures and language skills as their employees and customers as well as having different cost options and geopolitical risk spreading are critical factors for their long-term, global business successes. 

Industry Expertise: Companies that aim to achieve FAO adoption seek to align themselves with service providers who have “been there, done that” with peers in their industry.  Process knowledge and technical expertise requirements differ by industry, as do the drivers and inhibitors for business success in each industry. Innovative companies understand that and aim to leverage the industry acumen of their suppliers to achieve long-term contract success.  

Senior Management Involvement in the Project Upfront and Throughout: Every successful implementation and FAO engagement involves the buy-in and direct involvement of senior management at the start of the project. 

Single, Dedicated Point of Contact: Since outsourcing is a services business based on relationships, single points of accountability are crucial to manage the many parties involved in ensuring contract success, including transition managers, governance leaders, administrative personnel, and the like. 

Introduction of Flexibility into Service Delivery: Adding a component of variabiliy accommodate evolving business requirements, seasonal fluctuations, etc. 

Previous Business Relationship:  It’s helpful to know the company you are working with from your previous relations with them, but it’s not always imperative.  

Establishing FAO Objectives Upfront: These may include cost saving targets, accomplishments desired, or some other types of quantifiable measures so that you can have realistic goals to achieve and also benchmark against after you embark on the FAO endeavor. 

For F&A Outsourcing to be successful, clients need to have well established goals in mind that include more than cost-cutting.  As important as that is, the choice of an F&O outsourcing provider must be part of an overall strategy to deliver finance services globally.

CFOs struggle to measure outsourcing ROI

According to an article in Accountancy Age, many CFOs can't with any degree of certainty, calculate the value of their outsourcing contracts.  According to the study by outsourcing firm Cognizant Technology Solutions, only half of CFOs have even tried to calculate how much these contracts contribute to the bottom line, and of those that did, only 19% were "very confident" in their calculations.

An excerpt from the article:

Businesses in the UK spent 12% more on outsourcing contracts in 2008 than in 2007 according to the National Outsourcing Association and Cognizant’s research found that more than half of respondents expect to see ROI on their outsourcing investments within the first year.

But CFOs say assessing the value of these contracts is difficult because that value is not found in a one-time cost saving ­ a fact borne out by the finding that, of the CFOs that cut back on their outsourcing, 78% cite “unclear value for money” but could not quantify this further.

“Senior executives appear to be making outsourcing decisions based on shot-term cost cutting, but outsourcing’s impact stretches well beyond the in i tial labour, skills and cost advantages,” says Sanjiv Gossain, Cognizant’s managing director for the UK and Ireland.

Here's the link to the full article.

Ten lessons for avoiding outsourcing disasters

Here's a summary of a blog from AMR Research dealing with potential pitfalls of outsourcing deals.

1. Don’t just focus on core versus non-core, but evaluate what is fit and ready

2. Don’t jump at the lowest priced offerings

3. Temper executive expectations

4. Collect experiences of peers in other organizations

5. Think about future flexibility

6. Think about your internal learning

7. Think about the strategic value of IT

8. Evaluate the impact to the local community

9. Anticipate the impact to your corporate culture

10. Focus on broader outsourcing governance across IT, supply chain and financial processes

Conclusion

As the lessons above outline, the impact of outsourcing cuts far deeper than merely entering into a transaction with a service provider. Corporate leaders need to focus on their people, processes and technology in tandem when they evaluate and execute their outsourcing opportunities. Experienced outsourcing practitioners often use the “30% rule of thumb” when they evaluate an outsourcing business case: Simply put, if you’re not taking more than 30% of cost from the bottom-line, it’s probably not worth the upheaval to your business. Adhering to these 10 lessons should help you make that 30% worthwhile, if that’s your chosen path.

I particularly like point 2.  As important as it is, an outsourcing arrangement should never be just about price.  Reliability, the ability to partner with a client organization, flexibility to adapt to future needs and the position of the service in the overall delivery strategy of the organization are all critical factors in deciding what to outsource and to whom.

Here's the link to the full article.

Cognizant buys captive service unit to expand BPO capabilities

An article at Business-Standard.com discusses a recent purchase by Indian BPO company Cognizant.  Cognizant recently purchased the India-based captive service unit of UBS.  As part of the deal, Cognizant and UBS entered into a 5-year service agreement to support UBS' back-office processes.  Estimated revenue over the 5-year period is $442 million USD.

From Cognizant's perspective, this purchase expands their BPO capabilities while providing a guaranteed revenue stream.  According to the the article, "The acquisition will deepen Cognizant’s financial services’ domain knowledge and enhance its capabilities to provide integrated services across consulting and technology."

From UBS' perspective, the deal frees UBS from managing processes that they believe can be better managed by a 3rd party.  According to the article, "For UBS, the sale of the India Service Centre marks the next stage in the development of the UBS offshoring and outsourcing strategy. In recent years, the availability and maturity of third-party outsourced services has grown significantly. UBS has therefore decided to adopt a buy rather than a build strategy for its outsourcing needs, said the company in a statement. This will take advantage of the scale and expertise of third parties to improve efficiency, while reducing costs and increasing flexibility."

An interesting note is that UBS' India Service Center provided traditional support activities such as IT, but it also provided capabilities around research and analysis, something that has traditionally been held onshore but is increasingly seen as an appropriate function to offshore or even outsource.

Here's the link to the full article:

http://www.business-standard.com/india/news/cognizant-buys-ubs-captive-unit-for-75-mn/373422/

Welch Foods leverages BI to manage logistics costs

Identifying cost savings around a BI implementation can be difficult, yet Welch Foods, the maker of juices and jellies, has done just that.  The company spends over $50 million per year transporting their products, yet had a difficult time understanding their cost drivers.  Working with a company called Oco, Welch's implemented a BI system using the Software as a Service model.  The article doesn't quantify the cost savings, but Welch's was able to better understand their customer order patterns to identify opportunities to improve truck-capacity utilization.  The company claims their new BI system paid for itself in 30 days.

Something to note is that the company recently implemented Oracle as their ERP system, but still had other systems that were not integrated into Oracle.  As a result, they still had a fragmented IT strucctured and this BI model enabled Welch's to tie it all together.

 An excerpt from the article:

 The BI tool allows Welch's to analyze its logistics costs, volume and order flow "by many different dimensions," including by geography, manufacturing plant, distribution center, carrier, customer and shipping form, according to Coyne. Welch's now can aggregate any time periods, compare year-over-year time periods and analyze volume and cost by any sales division.

"But the real beauty of this is that we have… every data element on every order, every bill of lading and every freight bill in a single data warehouse, and with the ability to look at it in any way that we want, and then, beyond that, the ability to drill all the way down to an individual freight bill order or bill of lading," Coyne says. "If we see something that looks the least bit funny, we have the ability to drill down to an individual shipment or shipments."

Here's the link to the full article:

http://industryweek.com/articles/bi_tool_bears_fruit_for_welchs_19784.aspx?Page=2&SectionID=32?ShowAll=1

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.

Would you like research with that?

I've previously written about the desire of Indian companies to move up the value chain from a back-office transaction processor to a value-added business partner.  An article about the pharmaceutical giant AstraZeneca illustrates the point.  They recently signed a contract with Cognizant Technology Solutions to provide electronic support for AstraZeneca's research efforts.  This includes the hiring and training of clinical investigators.

The article puts it this way:

Pharmaceutical giant AstraZeneca has signed a $95m (£47m) deal with Indian outsourcing firm Cognizant to provide electronic support to its research and development (R&D) operations.

The five-year contract will require Cognizant to provide a range of services, data management planning, medical coding, and the training of clinical investigators.

The agreement is part of AstraZeneca's wider plans to improve the effectiveness of its R&D projects, according to Anders Ekblom, vice president of clinical development.

“Delivering efficiencies through reshaping our business is one of our key strategic priorities,” said Ekblom.

The article notes that the two companies had an existing relationship as Cognizant has been supporting AstraZeneca globally.  Companies will continue to look to outsourcers like Cognizant to help "deliver efficiencies through reshaping our business".  Companies like AstraZeneca understand that the use of selective outsourcing can greatly facilitate that goal.

Here the link.

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.