Globalization and Economic Growth

Globalization didn’t ruin the world—it just flattened it. And on balance that can benefit everyone, especially the poor. Globalization has pulled millions of people out of poverty in India and China, and multiplied the size of the global middle class. It has raised the global standard of living faster than that at any other time in the history of the world, and it is supporting astounding growth. All world economic activity was valued at $7 trillion in 1950. That’s equal to how much growth took place over just the past decade, even including the recent downturn. Whatever people’s fears of change, globalization is here to stay—and, if properly managed, it will be a good thing.

                Thomas Friedman - New York Times columnist and author of The World is Flat

New Global Outsourcing Hub - Wyoming?

A report from CNN discusses a new global outsourcing hub and it's not where you think.  This time it's in Wyoming.  The story discusses an innovative strategy of teaching English lessons to students in Asia using a real-time video link to classrooms.

From the article:

When it comes to call centers filled with English-speaking employees, India likely comes to mind. Not a tiny town in Wyoming called Ten Sleep, population about 300.   What Ten Sleep has is not, exactly, a call center. Instead, the town is home to a teaching center that is open 24 hours a day, seven days a week. There, American teachers provide real-time video English lessons to thousands of students in classrooms across Asia via high-speed fiber optic networks.

"This is more of an 'insourcing' phenomenon," said Robert Grady, managing director of Cheyenne Capital Fund, which invested $10 million in Eleutian in February. "We are creating jobs by helping the development and emergence of the high growth economies in Asia. We are the fastest private employer in Wyoming, and we are hiring at a time when job creation is priority number one."

 While this article doesn't directly relate to Finance & Accounting, it does hold some lessons:

1. Global sourcing is just that - global sourcing.  It's no longer a discrete decision between "Onshore" and "Offshore" but rather about defining your talent needs and locating the appropriate talent pool for a competitive price,
2. Creative minds find a way to complement the shift in global sourcing, rather than fighting it.  The company behind this operation could have complained about jobs moving offshore, but they found a way to compete.  After all, who better to speak American then Americans?
3. New talent markets are constantly maturing and shifting.  Even now, India and the Philippines are top locations when English language capabilities are needed, but new markets continue to emerge.  And as we see in this story, sometimes the new market is an old market.
4. Technology continues to drive the ability to source from new markets.  In this story it's the real-time video link.  In Finance & Accounting, it can be about scanning, workflow routing and Cloud computing.  Various technologies reinforce the death of distance and enable a truly global sourcing organization.

Here's a link to the full article.

Transforming Finance at Unilever

I came across a case study about Unilever's Finance organization that I found interesting.  As Unilever continues to enhance its global Finance organization, they've chosen to focus on five principles to drive their organization forward.  Before I get into those five focus areas, here are some quick facts about Unilever (as quoted from their website at www.unilever.com)

We employ 163,000 people in around 100 countries worldwide. In 2009 our worldwide turnover was €39.8 billion.

• Our products are sold in over 170 countries around the world. In many countries we manufacture the products that we sell, while we also export products to countries where we do not have manufacturing operations.
• The top 25 brands in our portfolio account for nearly 75% of our sales.
• We are the global market leader in all the Food categories in which we operate : Savoury, Spreads, Dressings, Tea and Ice Cream. We are also global market leader in Mass Skin Care and Deodorants, and have very strong positions in other Home and Personal Care categories.
• In 2009 we invested €891 million in research and development.
• We have 264 manufacturing sites worldwide, all of which strive for improved performance on safety, efficiency, quality and environmental impacts, working to global Unilever standards and management systems. Around 50% of the raw materials that we use for our products come from agriculture and forestry. We buy approximately 12% of the world’s black tea, 6% of its tomatoes and 3% of its palm oil.

Supporting an organization like that is no small feat.  So here are their five focus areas:

1. World-class Finance processes
2. People and Organization
3. Financial flexibility
4. Dynamic performance management
5. Innovative business partnering

One of the characteristics of world-class companies is that they transform their Finance organization to spend less time and money on transactional services and devote more time to decision support.  That mindset is inherent in Unilever's focus areas.  While the term world-class can mean different things, it typically measures the performance of both an organization's effectiveness at delivering a particular process (such as Accounts Payable) as well as the efficiency in which it does so.  True world-class processes are in the top quartile of their peers as measured by geographic reach and organizational complexity.

Another focus area that has become far more important during the economic downturn is the concept of financial flexibility.  Companies are looking for ways to reduce fixed costs and outsourcing has become a leading mechanism for achieving that flexibility.  Outsourcing relationships typically transfer the fixed cost to the service provider, giving a company more flexibility in how it structures costs.

The third comment I'll make is Unilever's focus on innovative business partnering.  Traditional Finance organizations focus on controllership.  Innovative Finance organizations look for value-added ways to interact with the business units they support.  This includes more sophisticated decision support tools and processes to enrich product and customer profitability, understand underlying cost drivers and to provide additional insight into acquisition targets.

In a future post I'll discuss the focus areas of People and Organization and Performance Management.

After the Go-live: Ten focus areas for effective Shared Service delivery - Part 1 - Engage in Consistent Governance

Note: This is the first post in a series focusing on the continuous improvement of Shared Services.

Creating and deploying a Shared Service Organization is a major initiative that requires substantial commitment from an organization.  Yet the deployment of a Shared Service Organization is only the beginning of the journey to create a high-performing service organization that partners with the Business Units and continuously creates value.  True value creation occurs over time.  As part of an on-going commitment, the following ten areas should receive management’s attention to drive value creation in the Shared Service Organization.

1.  Engage in Consistent Governance

As part of the planning process for the Shared Service Organization, a governance structure should be created to ensure appropriate oversight of the Organization.  If the Shared Service Organization has multiple service centers globally, the governance program will guide the entire Organization as well as the individual centers.

Governance committees should exist for the entire Shared Service Organization and for the processes within the organization.  The Steering Committee should be comprised of senior level executives with overall responsibility for the Shared Service Organization.  They resolve issues that haven’t been resolved at lower levels, provide continued funding of the organization,  and guide the expansion  of the Organization to incorporate additional functions that will drive valuation creation.

Process councils should be created to give oversight to each major process handled by the Shared Service Organization.  For example, the Procure-to-Pay process would receive oversight from executives in Procurement and Finance to ensure that global processes were as consistent and efficient as possible, to help resolve any conflicts that arose between organizational units, and to continue evaluating additional improvements that will drive efficiency while delivering value to the Business Units.

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 5

Note: This is Part 5 in a 5-part series.  You can click here to read Part 1, Part 2,  Part 3 and Part 4.

5.  A strong governance structure is not implemented.

The creation of a Shared Service Organization is much more than the consolidation of processes.  It involves creating a distinct organization that is committed to creating value in the company by providing support functions more effectively and efficiently than if they were embedded in the business units.  For this to be accomplished, the Shared Service Organization must be guided by a governance structure that provides the oversight and control that enables Shared Services to achieve its vision. 

The top governing body for Shared Services should include representatives from the major business units and IT as well as representatives from the major support functions such as Finance, HR and Procurement.  This body typically goes by the name of Steering Committee, and it is responsible for ensuring that the Shared Service Organization is fulfilling its mission.  They do this by giving oversight to the SSO, providing adequate funding, and resolving high-level issues that prevent the SSO from performing at its expected level.  The Steering Committee also has responsibility for providing an on-going vision to create value as additional processes are migrated to the SSO.

Another governance body that enables the SSO is the Process Council.  This council is comprised of subject matter experts (SMEs) for a given process, such as Procure-to-Pay.  In this example, experienced personnel from areas such as purchasing, inventory management and accounts payable would lend their expertise to ensure that this process worked as efficiently as possible.  Process councils meet regularly (typically once a quarter) to resolve any process-level issues and to evaluate additional opportunities to enhance the efficiency of the process.

Regardless of the committee or council, it is essential that the representatives of these governing bodies have the organizational and moral authority to get things done.  If these roles are delegated to low-level employees then the governance structure will not be effective.  A truly effective Shared Service Organization is guided by a coalition that has the authority, experience and dedication to drive the SSO to high performance.

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 4

Note: This is Part 4 in a 5-part series.  You can click here to read Part 1, Part 2 and Part 3.

4.  Comprehensive change management is not a priority.

Creating and sustaining change in any organization is difficult.  Too many companies focus on the mechanics of creating a Shared Service Organization with little thought to the human element.  Companies that have successfully reaped the benefits of Shared Services understand that a comprehensive and consistent change management program is essential to the successful deployment of Shared Services.

An important component of change management is identifying and engaging significant stakeholders early in the process.  When discussing Shared Services, the leaders of the company’s business units must be included.  Without engaging the business units in the change effort, the move to Shared Services will be seen as little more than the centralization of support services with only token input from the business units that will ultimately be the customers of the Shared Service Organization.

Creating a sense of urgency for change is important.  The fact is that the bar for efficient finance processes is being continually raised.  What passed for strong performance in previous years is now considered average performance.  As new offshore centers continue to mature, new opportunities to drive out costs appear.  The truth is that many competitors are reducing their cost structure and there is an urgent need to maintain a competitive cost structure.  As part of change management, it's up to the Project Sponsor and those entrusted with the message to effectively communicate the need and urgency of change.

Another essential component of change management is knowledge transfer.  Much of the knowledge in organizations isn't found in a binder.  It's captured in the minds of a company's employees.  It's critical to establish up front which employees are key to a successful transfer of knowledge and to integrate these key resources into the project.  Programs to establish job shadowing to enable the transfer of knowledge is essential.

While there are many other components of change management, the point is the companies that are successful in transferring processes to a Shared Service Organization understand the importance of the human element and incorporate it as an essential part of the overall program.

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 3

Note:  This is Part 3 of a 5-part series.  You can click here to read Part 1 and Part 2.

3.  Processes are consolidated into Shared Services without the required transformation

Companies sometimes take poorly performing processes from the business units and move them to the Shared Service Organization without engaging in the transformation necessary to standardize and optimize the processes.  This is often done with the best of intentions.  The thinking is that the company will consolidate the processes into a Shared Service Center to obtain the immediate benefit of labor cost reduction.  Many times this is done in conjunction with a shift in the delivery model from onshore to offshore.  Unfortunately, this often leads to the "my mess for less" syndrome, where there is some immediate cost benefit but the company is still left with a host of non-standardized processes that are no where near as effective as they should be.  This is fundamentally the "lift and shift" method of consolidation that does not focus on the simultaneous transformation of processes as they are moved to Shared Services.  Without this transformation, those poorly performing processes will continue to be a problem for the company by providing substandard service to the business units at a cost far above best-in-class.

In order to fulfill the vision of the Shared Service Organization, disparate processes from multiple business units and geographies must be reengineered to standardize those processes, incorporate best-in-class practices and technologies, and reduce the overall cost of delivering those services.  This is the "transform and shift" model and is most often used by companies seeking true finance transformation.  This approach takes a phased approach where the early phase is focused on understanding the existing processes and designing a series of standard future-state processes based on best-in-class practices and technologies.  Once there is a corporate standard for the in-scope processes, they can be migrated to a Shared Service Organization, either onshore or offshore, where the benefits of standardization will be delivered.  Leading companies often make this move in conjunction with an implementation or upgrade of a common technology such as SAP to facilitate the standard delivery of services.  This approach takes more time up front, but delivers far greater benefits for the long-term.

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 2

Note: This is Part 2 in a 5-part series.  You can read Part 1 here.

2.  The vision for Shared Services is not clear and compelling

Once a comprehensive strategy has been developed and the role of the Shared Service Organization in that strategy has been defined, it's essential to craft the vision of the captive service organization.  Too many companies move directly into the execution phase without clearly defining the vision around Shared Services.  A clear and compelling vision will paint a picture of the future, provide a high-level direction for change and create a reason for people to engage in behavior that will enable the achievement of that vision. 

An engaging Shared Service vision is one that is ultimately desirable for the company and its major stakeholder groups, even if it involves short-term sacrifice.  The vision should be realistic and concrete enough that people understand the goals of Shared Services.  The vision should be easily communicated to and understood by disparate stakeholder groups.

Without taking the time to create a clear and compelling vision of the future, it will be difficult to motivate people to commit to the change necessary to be successful.  It's essential that the Executive Sponsor of the initiative create a sense of urgency for moving forward.  People need to understand that there will be some short-term pain for long-term gain, but that the sacrifices are necessary to better position the company in a competitive market.

Harvard professor John Kotter sums it up well in his book Leading Change.  He identifies six attributes for an effective vision:

• Imaginable: Conveys a picture of what the future will look like
• Desirable: Appeals to the long-term interests of employees, customers, stockholders,and others who have a stake in the enterprise
• Feasible: Comprises realistic, attainable goals
• Focused: Is clear enough to provide guidance in decision making
• Flexible: Is general enough to allow individual initiatives and alternative responses in light of changing conditions
• Communicable: Is easy to communicate; can be successfully explained within five minutes

By creating a clear and compelling vision for Shared Services, the business case can be effectively communicated to all relevant stakeholders.  This increases the probability of successfully achieving the goals of the Shared Service Organization.

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 1

Leading companies have leveraged captive shared service centers to drive process standardization, improve service delivery and dramatically reduce costs. Yet many companies continue to struggle with the role of a captive service organization in their overall delivery strategy. Despite upbeat predictions from their business case, some companies have failed to realize the anticipated benefits from their Shared Service Organization. How is it that some companies fail to realize the benefits of Shared Services that many other companies have successfully realized? While every organization is different, there are common traits among companies that are not achieving the goals of their captive Shared Service Organization. Five of these mistakes include:

1. Shared Services is not evaluated as part of a comprehensive delivery strategy
2. The vision for Shared Services is not clear and compelling
3. Processes are consolidated into Shared Services without the required transformation
4. Comprehensive change management is not a priority
5. A strong governance structure is not implemented

In this first post, I'll address the issue of including Shared Services as part of a comprehensive strategy:

1. Shared Services is not evaluated as part of a comprehensive delivery strategy

A Shared Service Organization developed apart from a comprehensive delivery strategy will not effectively support the company’s corporate strategy. Depending on a company's previous success handling specific activities and its overall strategy, some processes that might move to a captive service center would be better of handled by a 3rd party, either onshore or offshore.

High performing companies focus on building a comprehensive delivery strategy that incorporates both captive and 3rd party suppliers. An organization’s service delivery strategy should support the overall corporate strategy and includes a consideration of the company’s existing and planned business lines and geographic presence. It also includes an objective analysis of the supplier-side capabilities from both the captive service organization and 3rd party service providers. Another consideration is the global distribution of support services including an analysis of onshore and offshore delivery options.

One of the major steps in determining where an activity will reside is to document the end-to-end process to include not only the individual activities in the process but also the department (such as Accounts Payable) that will be performing the task.  Once the totality of the individual tasks is understood and documented, a company can make a more informed decision regarding its ability to handle those activities in-house.  A number of factors will go into this decision including the company's ability to handle that specific activity, the effectiveness of handling it and the anticipated cost.  These metrics and others can be evaluated against 3rd party service providers.   When the decision to move to Shared Services is made in conjunction with a comprehensive delivery strategy, rational decisions can be made around the placement and delivery of services.

Developing a Shared Service pricing model that drives behavior

One of the challenges for companies moving to a Shared Service model is to decide how they want to price those services.  How a company chooses to recover its expenses will in large part determine the behavior of the business units who use those services.

I currently have a client that is moving a variety of Finance functions and activities to a Shared Service model.  As part of that discussion we're considering the various pricing models.  They have expressed reluctance to move to an activity-based model up front, fearing that it may to too radical a change for their corporate culture.  I believe it's a mistake not to consider the pricing model as an integral part of the Shared Service design.

When I was a Controller in private industry, I worked for a company that had its Finance & Accounting function centralized at Corporate, but were not part of a Shared Service Organization.  To be fair, this was a long time ago before the concept of Shared Services was really proven.  The problem was that we had a "buffet" pricing model - pay one price and you can go back for as much as you want.  As a result, we were getting endless requests from the business units because it didn't cost them anything to make special requests. 

A Shared Serivces pricing model should properly allocate costs back to those users who generate the most activity.  One pricing model that would accomplish this is a model that provides a core set of services, such as management reporting, for a basic price.  Activities that vary by volume and complexity, such as Accounts Payable or customized reports, would be priced based on volume and time required. 

To be sure, this model is not as simple as a flat rate pricing or one based simply on the FTE's in the business unit, but it is a model that will help generate the right behaviors.  Those business units that are content with the basic services can pay accordingly.  Those business units that generate more activity or have more "one-off" requests can decide if the extra cost is worth it.  By pricing the services of the Shared Service Organization based on volume and complexity, it requires the business units to use its resources and those of the SSO wisely.

Deciding on the Composition of the Shared Services leadership team

When forming a Shared Services Organization (SSO), it's essential to create a governance structure that provides oversight and guidance to the new organization.  Part of that governance structure is the Steering Committee which has overall responsibility for ensuring that the SSO fulfills its mission and is properly funded.

In creating an effective Steering Committee, the composition of that Committee is extremely important.  It's essential that all major stakeholder groups have representation of the Committee.

• Senior customer representatives. From the beginning, an SSO should be a partnership between the SSO and the customers it serves.  This means that the Committee should have senior representatives from the major lines of business.  A good rule of thumb is that if you view the business as a reportable segment for SEC reporting purposes, or if your internal management reports segment the business a particular way, then a senior representative from the operations of that segment should have representation.
• Leaders of key functions in the shared services.  If the SSO focuses on a single discipline such as Finance, than a leader from that group should represent them on the Committee.  It's becoming more prevalent to have a multi-function SSO, so a representative from each group, such as Finance, HR and Procurement should have representation.
• IT.  Whether an SSO is regional or global, IT plays a critical role in supporting the processes of the SSO.  It's essential that IT initiatives support the broader business initiatives.  Representation on the SSO Steering Committee will enable tight integration between the evolution of the SSO and its ability to support that evolution with existing and future IT investments.

Through all of this, the representatives on the Committee must have the organizational and moral authority to lead the SSO and to ensure that it is properly funded and staffed.  When this occurs, the SSO will have the governance structure needed to fulfill its mission and to continue adding value throughout its existence.

Philippine Outsourcing Expected to Grow 26% in 2010

A brief article at Philstar.com discusses growth projections for Philippine outsourcing.  The president of the Business Processing Association of the Philippines states that they continue to have ongoing discussions with companies about moving processes to their country.   Here's an excerpt:

Business Processing Association of the Philippines (BPAP) CEO and President Oscar Sanez said Monday that for this year the Philippine outsourcing industry targets 26 per cent growth and projects revenues will total $9.5 billion.

"Many companies are under pressure to reduce their cost structure and have considered outsourcing and offshoring to boost their competitiveness," he added

The outsouring sector is one of the country's fastest growing industries, accounting for about five percent of the GDP and employs more than 400,000 people. Last year, despite the global meltdown, the sector posted a 19 percent growth, hauling in $7 billion of revenue.

The Philippines is an attractive country due to strong English language skills and low labor costs.  An interesting point in the article is that outsourcing now accounts for five percent of GDP.  While wage inflation has been a concern, the Philippine government is actively working to contain inflation.  It'll be interesting to see if 2010's actual numbers are in line with this prediction.

Managing Shared Services and BPO through Metrics

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

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

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

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

Business unit accountability: Process Governance

I've previously discussed the need for the Business Units to partner with Shared Services in creating the Finance organization that delivers services effectively and with a competitive cost structure.  One way to do that is to participate in process governance.

Process governance is focused on creating and sustaining end-to-end processes that are highly efficient while meeting the needs of the Business Units.  It involves the active representation of the Business Units in Process Councils to ensure that their requirements are understood and met.

Process Councils accomplish the following:

1. Establish standard processes and handoffs between the Business Units and the Shared Service Organization.  One challenge in organization is the tendency to view activities in silos, such as Finance and Procurement.  Highly efficient processes transcend this silo mentality and are designed as fully integrated, end-to-end processes.  This involves crossing over artificial organizational boundaries to create highly efficient processes.  A Process Council with the appropriate representation can help break down these organizational barriers.
2. Identify and solve issues that arise at the process level.  Issues will inevitably arise in the execution of services to the Business Units.  The Process Council is a forum where Business Unit representations can bring their concerns and have them addressed.  For this to be effective, the Business Units need a mechanism in place to ensure that issues identified in the day-to-day operations are brought to the attention of the Process Council representative.
3. Stay apprised of emerging best practices within the process sphere.  The representatives to the Process Council should be informed and aware of changes in their industry and the emerging best practices for the processes under their stewardship.  These ideas should be discussed during meetings to identify the initiatives that should be given the green light.
4. Identify initiatives and set priorities.  The Process Council will have the opportunity to discuss a variety of initiatives that could be conducted to enhance the service delivery capabilities of the Shared Service Organization.  It will be up to the Process Council to identify these initiatives and to order these priorities to support the vision of the SSO.  Process Council representatives should have a good understanding of the major corporate initiatives and how their proposed initiatives would support and interact with these broader initiatives.  Process Council representatives should also be prepared to give input into any business case that would need to be developed as part of the initiative approval process.
5. Oversee the implementation of new activities.  The Finance organization and their partners in the business units should always be looking for new ways to optimize processes.  This could involve bringing new activities into a captive Shared Service Center or it could mean outsourcing part or all of that process.  The Process Council and its members have a responsibility to make this determination on an on-going basis and to oversee the execution of these initiatives to ensure they deliver the anticipated business value.

By participating in Process Councils, Business Units can be properly represented in the on-going effort to optimize the processes delivered to their organization.  This shouldn't be optional for the Business Units.  It is essential that appropriate representatives be assigned to the governance process to ensure representation and accountability of the Business Units.

HP's Lessons Learned on the road to Shared Services for Finance & Accounting

Sourcingmag.com has an interesting case study from Les Mara, the head of HP BPO in EMEA.  In the article he discusses HP's journey in Shared Services, the benefits and the lessons learned.  Below is an excerpt from the article showing the "lessons learned"  that I thought was particularly relevant: 

1. Understand why you are pursuing a shared services/outsourcing model -- It's important to develop a compelling business case for moving to a shared services/outsourcing model. Whether it's to reduce finance transaction processing costs or to increase operational efficiency, a company needs to have a clear idea of what a shared services and/or outsourcing operation will do for them.
2. Secure buy-off from stakeholders -- The shared services/outsourcing concept cannot be imposed upon the business units. Leadership within the company must obtain buy-off from the individual units. It takes an investment in governance and stakeholder sponsorship in order for shared services or outsourcing to succeed.
3. Anticipate change -- This also brings about an organizational change, therefore leaders need to develop a clear communication plan targeted at the various stakeholder groups. This allows the company to anticipate and manage risks proactively.
4. Invest in training and recruitment -- Roles and responsibilities change in this new model. Companies need to invest in training and recruitment of team members on the internal resources for their new shared services or outsourcing responsibilities.
5. It's a continuous journey -- Shared services/outsourcing is not a journey with a beginning and an end. This is a continual process and HP is still on this journey and reaping the benefits along the way.

Note how the five points focus strongly on the human element.  While there are a number of factors that go into creating a successful Shared Service Organization, little of it will matter if change management is overlooked.  The extent to which key stakeholders and the organization's employees embrace the move to Shared Services will largely determine how quickly and successfully the business case for Shared Services is achieved.

Here's the full article:  HP's Journey to Shared Services Finance & Accounting Success

World Bank forecasts 9.5% China growth

An article in the Shanghai Daily newspaper discusses new growth projections for China this year.  The World Bank is predicting 9.5% growth.  This growth will be lead by investment from the private sector as well as increased consumption and away from government led stimulus.

An excerpt:

China's economy is projected to grow 9.5 percent on an annual basis this year, with a shift from government-led investment to a mix of solid consumption, recovered exports and stable investment, the World Bank said today.

"Despite the global recession, China's economy grew 8.7 percent in 2009, and the growth momentum continued in the first months of 2010," said the World Bank's latest China Quarterly Update, a regular assessment of the China's economy.

It lay the ground for the bank to give an optimistic forecast of 9.5 percent for China's economic growth this year, which is well above the Chinese central government's target of 8 percent and United Nations' earlier prediction of 8.8 percent.

Here's a link to the full article:

World Bank Forecasts 9.5% China growth

Manage risk through an Outsourcing Management Office

As more companies look at both onshore and offshore outsourcing for Finance and Accounting processes, there is a greater need to coordinate efforts to manage the risk inherent in outsourcing.  Risk is inevitable in any relationship.  In an outsourcing relationship, the major components of risk include:

• Strategic risk
• Operational risk
• Financial risk

Fortunately, companies are developing effective ways to mitigate that risk.  One way to mitigate outsourcing risk is through an Outsourcing Management Office (OMO).  The OMO is similar to a PMO in that it creates a central standard for policies, procedures and tool sets used to initiate, manage and end outsourcing relationships.  And like PMOs, the OMO can vary widely in its influence over an organization.  On one end of the spectrum is a consultative OMO that provides tools and coaching to govern the outsourcing process.  At the other end is a highly directive OMO that coordinates and aggregates outsourcing relationships and enforces standards.

Some of the activities of an OMO include:

• Coordinate efforts across business units to manage enterprise level risk,
• Provide training to business units on the corporate approach to outsourcing,
• Rationalize outsourcing suppliers to negotiate the best deal,
• Standardize approach to outsourcing to minimize up-front costs,
• Provide contract templates to leverage knowledge from previous contracts,
• Provide coaching to business units involved with outsourcing execution,
• Establish performance monitoring metrics

As outsourcing continues to grow, companies will need to put in place a stronger governance function to ensure that the benefits of outsourcing are realized.  An Outsourcing Management Office is one way of managing that process.

Where should the Shared Service Organization reside in a company?

A common question that I get in my consulting work revolves around the governance structure of Shared Services, specifically the issue of organizational reporting and accountability for the Shared Service Organization.  Essentially it boils down to: To whom should the Shared Service Organization (SSO) report?

The answer isn't as clear cut as it once was.  Companies continue to leverage their investment and knowledge in Shared Service to migrate additional services to the SSO.  And many of these functions and activities are outside of the traditional domains of Finance, IT and HR.  If an SSO handles a large number of operational activities, say direct materials purchasing and transportation scheduling, it might make sense to have the SSO report to the COO.

For the purpose of this post, however, I'll cover an SSO that focuses on the traditional functions of Finance, IT and HR.  In this case, the question is still relevant.  What is the right level within the organization and to whom should the SSO report?  I'll come right out and say that I believe it should be the CFO.  Not every company agrees.  I've had clients where the SSO reported to a lower position, such as a Corporate Controller or the Chief Accounting Officer.  The argument, either made explicitly or implicitly, is that the SSO primarily handles transactional, and tactical, activities such as accounts payable processing.

While I wouldn't argue that A/P processing is strategic in nature, I believe that argument misses the bigger point that how a company chooses to deliver services domestically and globally is a much more strategic decision. A comprehensive strategy that addresses global delivery capabilities and that aligns with corporate strategy is very much a concern of the CFO.  For that reason, the Director of the Shared Service Organization should report to the CFO.  Add to the fact that in many organizations the CFO has direct responsibility over IT and other administrative functions, and it makes sense that the CFO is the logical choice to oversee a company's Shared Services Organization.

The New Normal: A Spot Check from CFO.com

CFO.com has posted the results of an interesting survey that polled executives about the impact of the recession on their organizations.  In my opinion, some of the interesting statistics are:

1. Over 1/3 of those polled believe they'll see an uptick in their services as late as the 4th quarter 2010.
2. 40% of companies believe that the downturn has resulted in a worsening of their relationship with employees.  Remember, this is the executive's perception.  I'm inclined to believe that the number is actually higher.  Even if the 40% number is accurate, it still represents a talent management issue when the economy turns upward.
3. 56% believe the recession yielded a reduction in overall headcount while preserving talent.  This statistic might be true, but I'd like to remind those executives that it's relatively easy to reduce headcount while preserving talent when a sluggish economy makes it difficult for that talent to jump ship.  Similar to point 2, the real proof will be when the economy picks up.

Overall, an interesting survey.  Thanks to CFO Research Services and American Express for publishing it.

Source: CFO.com - The New Normal: A Spot Check

Should a Shared Service Organization price its services to make a profit?

When setting up a new Shared Service Center or optimizing an existing one, the pricing model is a critical component.  The pricing of services impacts the behavior of both the Shared Service Center and the Business Units, and can ultimately impact the pricing of goods and services produced in the Business Units.  A question that sometimes comes up is: "Should our Shared Service Center price to break even or should we attempt to become a profit center?"

Before I answer that question, let's look at some of the potential pricing models:

1. Centralization of services without cost charged back to the Business Units.  This is the most basic model and is often employed by companies just starting on the journey to Shared Services.  There will be a move to centralize support services in the corporate group.  This centralized support group doesn't have a separate identify or a separate budget.  Consequently, its costs are simply part of the broader corporate organization.  Perhaps the costs are ultimately allocated back as part of a corporate allocation, but the costs of the service organization itself are not directly allocated back to the Business Units.  Consequently, no signal is sent to the Business Units about the true cost of the services they're consuming.
2. Cost allocated back based on fixed price.  Among the charge-back models, this one is the simplest.  An estimate of volume is made and a price is set based on that estimate.  This pricing mechanism can be update annually as part of the annual budgeting process or more frequently if desired.  At a minimum, it sends the message to the Business Units that they are in fact paying for these services, but ultimately it isn't based on actual volume.  Consequently, the B.U.s won't have a vested interest in reducing its consumption of services or partnering with the SSC to optimize processes and reduce costs.
3. Cost allocated back based actual volume (e.g. invoices processed).  This model charges back costs based on an activity drivers so that the Business Units creating the most volume and consuming the more complex processes will pay more for their services.  Only the actual cost is charged back and no profit margin is built in.  The SSC acts as a true cost center without a profit motive.
4. Cost plus a profit margin charged back based on actual volume. This model is similar to the one above but adds in a pre-determined profit margin.  The SSC acts as a profit center; however, it only sells its services internally and does not attempt to sell its services to customers outside the organization. 
5. Market-based pricing model.  In the market pricing model, services are priced to reflect the actual value of the services in the open market.  If you think of the Business Units "outsourcing" their support services to an separate entity, the choice is between a captive service unit providing those services or an independent organization providing them.  In effect, the captive unit and the independent supplier are competitors.  The market pricing model reflects that reality.  Ultimately, if a captive service organization can't provide the services at or near market, the company should consider outsourcing that service to an outside party that may specialize in the process (e.g. Payroll) and has the ability to perform more efficiently than the captive service center.

The two models that should be considered are the cost model and the market pricing model. Companies often choose a captive model over outsourcing because they believe they can provide those services more cheaply than an outsourcing arrangement over the long haul (initial costs are a separate discussion).  This lower cost will provide an additional advantage to the Business Units as they price their own goods and services for the external market. 

Market pricing can make sense, particularly if the company intends to sell to external customers.  Genpact, the former captive GE service unit, it a good example of a previous captive that became its own business.  If the SSC has become so efficient that it can price at market and still make a profit, it doesn't distort the Business Unit pricing mechanism since they would have to pay that market price regardless of whether that service was bought from an captive service unit or an independent company.

While both the cost model and the market pricing model have their roles in a company's overall strategy, one this is clear:  A captive service unit shouldn't pursue a profit strategy at the expense of the Business Units it supports.