Shared Service Centres: Delivering Value From Effective Finance And Business Processes (Management Briefings Executive Series)

Shared Service Centres

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Shared Service Centres Delivering value from more effective finance and business processes

ANDREW KRIS MARTIN FAHY

PEARSON EDUCATION LIMITED Head Office: Edinburgh Gate Harlow CM20 2JE Tel: +44 (0)1279 623623 Fax: +44 (0)1279 431059 Website: www.briefingzone.com

First published in Great Britain in 2003 © Pearson Education Limited 2003 The rights of Martin Fahy and Andrew Kris to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 0 273 66310 0 British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library. All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the publishers. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the authors nor the publishers are engaged in rendering legal, investing, or any other professional service. If legal advice or other expert assistance is required, the service of a competent professional person should be sought. The publishers and contributors make no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any responsibility or liability for any errors or omissions that it may contain. 10 9 8 7 6 5 4 3 2 1 Typeset by Monolith – www.monolith.uk.com Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hants. The Publishers’ policy is to use paper manufactured from sustainable forests.

About the authors

Andrew Kris is the founder of akris.com, the leading online source of independent knowledge and advice on shared services and business process outsourcing (BPO) and host of the Shared Services and BPO Association (SBPOA). Andrew is a sought after head-hunter, business strategist and author in his own right. He is the coauthor of Shared Services: mining for corporate gold, published by Financial Times Prentice Hall and recently reviewed as ‘the Michelin Guide of shared services’. Andrew is a marketing graduate and INSEAD alumnus with over 25 years’ experience in the management of global corporations. Andrew’s experience includes leadership positions on the management boards of business and regional units of The Dow Chemical Company. Andrew now leads the team at Borderless Executive Search, a transnational executive search firm, which he founded in 1997. Andrew believes that organizational value stems from an in-depth understanding of markets and an unflinching focus on customer service, a passion he extends to shared services as a leading commentator in this field. Andrew can be contacted at: Borderless Executive Search Rue de Bretagne 26 1200 Brussels Belgium Tel: +32 2 777 9680 Fax: +32 2 777 9699 Web site: www.besworld.com E-mail: [email protected] Martin Fahy is a senior lecturer in Accounting and Information Systems at National University of Ireland, Galway. He is a chartered accountant and holds a PhD in informatics from UCC. Prior to joining NUI, Galway he worked as a management consultant with KPMG. In recent years he has been involved with such shared services as Oracle IeBC, Xerox, Nortel as well as the SSC practices of KPMG and Deloitte and Touche. He has also undertaken ACCA sponsored research on the area. In addition to his work on shared services he has written extensively on the areas of business information systems, ERP systems and emerging issues in finance. He is currently an adjunct professor at the Université d’Auvergne in France and is involved in research in the areas of shared service centres and strategic enterprise management. His most recent books include ERP Levering the Benefits (a joint

v

About the authors

venture with CIMA and PwC) and Strategic Enterprise Management Systems. He is currently convenor of the CIMA SEM roundtable. Martin can be contacted at: Department of Accountancy and Finance National University of Galway Galway Ireland Tel: 353 91 512040 Fax: 353 91 750565 E-mail: [email protected]

vi

Contents

List of tables

x

List of figures

xi

Foreword

xiii

Executive summary

xv

Acknowledgements

xvii

Introduction

xix

1

2

3

Shared services: It’s not just about cost saving – it’s about value harvesting

1

The nature of SSCs Origins and rationale for SSCs Whirlpool – an early player in SSCs The aims and objectives of shared service centres Isn’t this like outsourcing? A good SSC takes time and resources to establish

3 8 15 18 19 20

Shared service activities

23

Introduction If the future looks like anything it looks like Oracle shared service centre Some lessons learned Conclusion

25 26 31 33

SSC – people, processes and systems

35

The need for strong foundations The importance of information technology The limits of IT – enterprise application integration Emerging best practice in SSCs Conclusion

37 40 47 49 56

vii

Contents

4

5

6

7

8

viii

Location and migration

59

Why location matters Do I have to move? SSC locations – criteria for decision making The global geography of shared services today Conclusion

61 61 62 66 70

Business process outsourcing

71

Introduction Why outsource internal services? Tips for the outsourcing decision Managing the outsourcing relationship Conclusion

73 73 76 78 81

Change, leadership and stakeholder management 83 Introduction The nature of change in SSC environments Stages involved in migrating to the SSC model Lessons learned from SSC implementations Realizing benefits from the SSC implementation SSC management What to expect from the leader of shared services Coping with culture and distance Conclusion

85 85 87 90 96 97 101 104 105

What’s this thing called culture?

107

Introduction Culture and the SSC Areas where culture affects the SSC Culture shock and intercultural adaptation Conclusion

109 110 111 114 115

Performance monitoring and benchmarking

117

Introduction What business unit clients want from their SSC The role of SLA’s measurement and reporting The SSC scorecard

119 119 120 124

Contents

9

10

Comparing performance – the role of benchmarking Conclusion

126 129

E-shared services

131

Introduction How the web is transforming bean counting How the web is transforming shared services Challenges for e-shared services Lights-out processing: vision or hallucination Conclusion

133 134 136 151 153 154

Future directions

157

Trends for the future of SSCs Conclusion

159 164

ix

Tables

1.1 The top ten services typically provided by SSCs

4

1.2 The scope of shared services

11

1.3 Top four reasons for the growth in SSCs (%)

12

1.4 An SSC is different to centralization

19

3.1 Technology types and benefits

40

3.2 FSSC benefit analysis of three major areas

56

4.1 Top criteria when selecting a site for the SSC (%)

61

4.2 Criteria for site selection

63

4.3 SSC location criteria based on a review of the literature

65

4.4 Some emerging offshore options

67

5.1 Examples of SSC activities which might be outsourced

74

6.1 Sample job specification for an SSC director

103

7.1 Stages in adaptation

115

8.1 Examples of SSC measures by process

122

8.2 Four steps to SLA definition

123

9.1 How automation software improves service delivery and management 138 9.2 The costs of failing to automate

140

9.3 Lucent EMEA business services: level of provision

142

9.4 Lucent expense management tool: benefits and issues

143

9.5 Electronic procurement at Lucent

145

9.6 Electronic imaging and workflow at Lucent

146

9.7 Analysis of the implementation of main IS projects at Lucent FSSC

148

9.8 People-related critical success factors in IT implementations at Lucent

150

9.9 Process-related critical success factors in IT implementations at Lucent 150

x

Figures

1.1

The SSC model

3

1.2

A continuum of shared services models

5

1.3

Savings from SSCs – planned and actual

10

1.4

The greatest risks in setting up an SSC (%)

21

2.1

The changing face of shared services 1980–2002

26

2.2

The path to shared services

28

3.1

Typical ERP architecture

41

3.2

Types of ERP systems used in SSCs (%)

43

3.3

Using data warehousing to meet analysis and reporting requirements

44

3.4

Web-based information delivery

51

4.1

Example of a comparison of different locations

66

4.2

North American SSC locations

68

4.3

EMEA SSC locations

68

4.4

Asia Pacific rim SSC locations

69

6.1

The Partners for Change approach to the shared services project life cycle

91

7.1

The different cultures that may be at work in the SSC setting

111

8.1

The level of adoption of SLAs (%)

121

8.2

The nature of SSC benchmarking

126

8.3

Methods used for monitoring SSC performance (%)

127

8.4

Example of the benchmark from the KPMG SSC study

128

9.1

Advantages of task synchronization

139

10.1 Finance to business

161

10.2 Extending the reach and range of the SSC

162

xi

Foreword by Robert Gunn, Founder, Gunn Partners

If imitation is the sincerest form of flattery, then irony is surely the highest form of mockery. And what is ironic indeed is that European companies, existing in the birthplace of shared services, are proving so reluctant to embark on the shared service journey. Culture and loss of control are the most frequently cited reasons for standing pat. Today that option – doing nothing – sinks of its own weight. The odds on reality is that the old ways result in administrative organizations that are two to three times less productive than shared services; waste human talent on tasks that are best performed using web technologies; create structural obstacles that prevent organizations from being flexible and agile. But culture is nothing more than the barnacle-encrusted assumptions and beliefs that Ford began proving back in 1981 amount to nothing more than bits of flotsam. As any leader knows, the ultimate loss of control is failing to implement the obvious when circumstance permits success on one’s own terms. The clock is ticking! Our global economic malaise is increasing the need for cost reductions. Emerging outsourcing companies, such as Exult, will soon be acknowledged as a credible alternative to in-house operations. Free market forces are stripping the veil from inefficient organizations, ineffective processes and underleveraged resources. Spend the new few hours reading this book and then reflect on its many insights. May you be inspired to begin taking those actions previously deferred.

xiii

Executive summary

What’s the outlook for shared services? You don’t need a crystal ball. Shared services and related BPO are set to generate substantial future revenue streams for consulting and technology firms. ‘Lights-out processing’, ‘virtual shared services’ and ‘commercialization’ are in the vocabulary of thought leaders; future shared services will certainly utilize some of these concepts. But this may be missing the point altogether. Empirical data and the latest surveys from the Shared Services and Business Process Outsourcing (SBPOA) support the view that at least 50 per cent of shared services fail to meet their stated goals in cost reduction and quality improvement. There are too many shared services operations that under-perform and if this continues we are putting the future for shared services at risk. Why do shared services under-perform? Because too many shared services initiatives are nothing more than centralization projects under another name. Centralization is just one swing of the centralize/decentralize pendulum and though savings do result, they are one time gains that are all too easily reversed as the cycle continues. Shared services breaks the cycle and locks in the benefits of consolidation, building on it as part of a sustainable, competitive business strategy. Real shared services is about creating an enterprise, internal or outsourced, that applies the same economic discipline that all businesses need for success. The best shared services deliver services that their customers value, to the extent they are willing to pay for them time after time, at a cost, quality and timeliness that is competitive with alternatives. It would be a pity to lose the plot and forget to hammer home this simple definition at a time when business crave organizational efficiency and the opportunities to create shared services is rising rapidly, well beyond levels anyone predicted just a few years ago. Most USD 500 million plus organizations of some complexity of those with a growth by acquisitions strategy will turn to shared services and its cousin BPO to achieve gains in efficiency and effectiveness. They will need to do so simply to remain competitive.

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Shared Service Centres

So what can we do to make sure that the future remains bright? Here are three ideas: 1 Be rigorous in defining and talking about shared services – always stress it is not simply about consolidation, it must be run as a business whether it is internal to the organization or outsourced. 2 Encourage clients to step out of the old corporate function mode and ask – if this was a stand alone business rather than a transformation project, what would you do differently – why don’t you do it? 3 Focus on people not the technology. Assist the breaking down of cultural, organization and political barriers that inevitably stand in the way of running shared services as a business. The purpose of this book is to ensure that the relatively straightforward components of setting up a shared services centre – mainly concerning technology – do not distract us from looking at the really vital aspects which can mean success or failure: people issues. The book covers some of the last progresses in shared services – virtual centres, lights-out processing and the rest – but this should not stop executives from understanding that change management and an approach carefully blending culture of all business units involved in the process are the key factors. The future may not be what it used to be, but we can all do a little to make sure that it remains positive for shared services.

xvi

Acknowledgements

The authors have made every effort to contact all sources mentioned in this briefing. They would like to thank the following people and organizations for their contribution to this book, in no particular order: ■

Barbara Quinn, co-author of Shared Services – Mining for Corporate Gold. Barbara is a founding partner of 22c Partners Inc., a consulting firm that inspires organizations to have the courage and commitment to make changes for the good of people and the growth of profits.

■

Robert Cooke, co-author of Shared Services – Mining for Corporate Gold, of Intex Consulting Group Inc.

■

Robert Gunn, of Gunn Partners.

■

Peter Moller, of Deloitte & Touche.

■

KPMG.

■

Moran, Stahl & Boyer.

■

CFO.com

■

PricewaterhouseCoopers.

■

Partners for Change.

■

Borderless Executive Search (www.besworld.com).

■

Oracle.

■

Whirlpool.

■

The Shared Services and Business Process Outsourcing Association – SBPOA, Brussels, Belgium (www.sharedxpertise.org).

xvii

Introduction

AN IDEA WHOSE TIME HAS COME As organizations struggle to create and sustain shareholder value, executives are continually challenged to deliver effective business processes. In particular organizations and CFOs are faced with the triple challenges of: ■

creating a finance and administration organization that adds value;

■

deploying consistent high quality global e-business processes;

■

providing business transaction processing at increasingly low unit costs (typically at less than 0.5 per cent of total revenue).

The market in which multinational companies operate is characterized by globalization, mergers, acquisitions and consolidation requiring companies to standardize operations to stay competitive. An effective way of keeping costs down and improving efficiency is by moving certain functions to one central location. Centralization is only half the story. An increasingly popular and effective way to meet this challenge and achieve sustainable benefits is for companies to set up a shared service centre. This book is the place to find out more about how to create, lead and develop shared services to achieve and sustain dramatic improvements in business performance. In the context of an increasingly competitive business environment, we think it is time to turn administrative functions from inevitable overheads into forms of internal enterprise. We believe that simple consolidation of duplicated activities is not enough. An economically viable internal unit, operating on the basis of competitive business economics and process driven to reduce transactional costs, is the way to go for cost-effective, quality services. Shared services has become the solution of choice for the effective, cost-efficient provision of administration and support services for large, complex organizations worldwide in both the private and public sectors. Shared services is increasingly considered an option for mid-size firms seeking to achieve best-in-class economics for their administrative functions. Shared services is here to stay. It is notable that business process outsourcing (BPO) firms also choose to utilize the shared services concept to deliver rapid access to shared services economics and quality. As we know, the benefits are too compelling to ignore. With real value going to the bottom line, CEOs all over the world are waking up. Driven by economic realities and technological development, shared services has become a sophisticated service business. The challenges of the present demand that those who build shared services in the

xix

Introduction

future do so in ways that are much sharper and more intelligent. Shared services will continue to work best when companies exploit its power as an intelligent solution to growing overheads.

TRENDS INFLUENCING THE GROWTH OF SHARED SERVICES Shared services entered the corporate lexicon in the early 1990s as large decentralized companies looked to combine basic transactional processes such as payroll, purchasing and accounts payable, and sell back those services at cost to the individual business units. As companies extend their presence across borders, it becomes increasingly uneconomical to maintain a duplicate accounting infrastructure within each country of operation. ■

According to recent estimates, 45 per cent of people costs in large organizations is generated by employment within internal service units.

■

Internal service units are frequently perceived as too large, costly and inefficient.

■

They are often criticized for being unresponsive, monopoly suppliers.

■

Their existence is questioned by other parts of the organization that view internal units as unproductive overhead.

■

Employee morale in internal service units is frequently lower than that of the rest of the organization.

■

Few objective measures are used to assess the quality and performance of internal services.

■

Restructuring, elimination and outsourcing of formerly ‘essential’ departments is a reality.

WHAT THIS BOOK OFFERS The level of interest in shared services has risen dramatically in recent years and many Fortune 500 firms are currently deploying SSC architectures. Conferences, seminars and briefings on the topic are well attended and previous works by the authors have proved very popular among executives. Executives are looking for focused yet independent advice on a variety of SSC issues. Faced with making substantial investments in setting up SSCs, executives often feel impoverished in terms of a reliable source of insight. The depth and format of the book will be particularly attractive to those considering implementing SSCs as well as those interested in revamping existing SSC operations.

xx

Introduction

The book breaks new ground throughout, explaining how and why more and more organizations are turning to shared services solutions with one eye on operational excellence and the other on their bottom line. In a global economy that has left behind the perpetual motion of centralization and decentralization, more creative ways of reorganizing staff functions are needed. The book explains how organizations can tap into the wealth of opportunities that shared services provides by clearly outlining processes for evaluation, planning and implementation. Because ‘shared services is a business whose services are bought by its customers’, the book provides ample tips on building staff commitment through good team dynamics. It looks at the structural diversity of shared service centres and the role that good centre design plays in the quest for really effective shared services. Andrew Kris and Martin Fahy consider the face of shared services today and tomorrow – looking at the challenges posed by the marketplace, increased outsourcing and the consulting boom. The book includes expert advice, processes, tools and information on the design, implementation, development and location of shared services and how to separate corporate governance activities. The authors provide practical, experience driven examples from all over the world and include sample presentations, tools and templates for immediate use. Specifically the book helps senior executives to: ■

understand the shared services approach and the rationale behind its emergence in the past five years;

■

explore the strategic issues which influence or impact the SSC decision;

■

become familiar with the management, technological and process challenges which SSCs present;

■

develop a unique methodology or framework to support SSC deployment in their organization;

■

deploy a shared services architecture and culture which supports sustainable value creation;

■

employ best practice processes and systems including performance monitoring and compensation;

■

respond to the emerging opportunities for e-shared services and business process outsourcing.

The book combines best practice advice and guidance with case studies from bestin-class shared services. Its two authors provide a unique insight into the SSC phenomenon and combine to provide pragmatic yet reflective guidance based on their experiences of working with some of the world’s leading shared service centres.

xxi

Introduction

The Shared Service Centres book can benefit you if: ■

you want to improve the cost-effectiveness of your organization;

■

you would like to find out more about shared services or business process outsourcing (BPO);

■

you are seeking the facts to help the executive team understand the issues and assist its decision-making process;

xxii

■

you are considering outsourcing business processes to an external supplier;

■

you lead or work in an internal service or shared services team;

■

you regularly provide advice on shared services or BPO;

■

you are involved in activities related to shared services;

■

you would like to enhance your own knowledge and experience in this field;

■

you want to attract external customers for your internal unit’s services.

1 Shared services: It’s not just about cost saving – it’s about value harvesting

■

The nature of SSCs

■

Origins and rationale for SSCs

■

Whirlpool – an early player in SSCs

■

The aims and objective of shared service centres

■

Isn’t this like outsourcing?

■

A good SSC takes time and resources to establish

3 8 15 18

19 20

1

Shared services: It’s not just about cost saving

THE NATURE OF SSCs Shared service centres (SSCs) began life in the US in the 1980s, typically to process high volume, low value transactions for the finance function. Since then, organizations worldwide have established national SSCs or overcome significant geographical, cultural, linguistic, political and economic obstacles to implement cross-border SSCs. They are referred to as shared services, because their activities are shared by units across entire organizations, instead of similar services being duplicated in each unit (see Figure 1.1). Typical services include finance, treasury, human resources, information systems, legal, marketing, purchasing and R & D.

The SSC model

Fig. 1.1

transactions

Customers and suppliers relationships

Shared service centres Shared service centres

relationships

Business ‘A’

Businesses in any country

Business ‘B’ Business ‘C’

The main aims of moving into a shared services environment are to: ■

enhance corporate value;

■

focus on partner service and support;

■

liberate business and operating units to focus on the strategic aspects of their operations;

■

transfer business units’ non-core activities into shared services units;

■

create a motivated team that provides consistent, reliable, cost-effective support;

■

lower costs and raise service levels;

■

make the best use of investments in technology;

■

focus on continuous improvement;

3

Shared Service Centres

■

harmonize and standardize common business processes to reduce duplication;

■

facilitate integration post-merger or post-acquisition.

Shared services operate within organizations by providing services to internal clients. They operate on business principles and provide services at a cost, quality and timeliness that is acceptable to its clients when assessed against alternatives. Some internal units generate revenues for the parent organization by selling services and expertise to third parties. Businesses referred to as ‘outsourced’ shared services also provide a range of common services, using similar processes and systems to achieve economies of scale and by leveraging expertise through ‘sharing’. As Table 1.1 indicates, finance transaction processing is the dominant activity of most shared service centres. Research carried out by the Shared Services and Business Process Outsourcing Association (SBPOA) suggests that while in many cases firms will begin by moving structured transaction processing such as accounts payable and travel expenses to the SSC, this will quickly give way to more value added services such as statutory reporting, etc. Table 1.1

The top ten services typically provided by SSCs

1.

Accounts payable

2.

Accounts receivable

3.

Travel expenses

4.

General ledger and consolidation

5.

Payroll

6.

Fixed assets

7.

Cash management and treasury

8.

Compensation and benefits

9.

Credit and collection

10.

Financial analysis and reporting

Source: Andersen/akris.com survey (2001)

A number of approaches to shared services are being adopted around the world. They range from the most basic form of consolidation of transactional activities all the way to creating an independent business set-up to provide shared services internally and to sell shared services externally to multiple clients. There are choices and decisions to be made and the models need to be seen as evolutionary over time as the shared services organization has a chance to mature and evolve. Figure 1.2 illustrates the continuum of shared services models identified by Quinn et al. (2000).

4

Shared services: It’s not just about cost saving

Fig. 1.2

A continuum of shared services models

Basic ■

Consolidation of transactional/ administrative work ■ Focus on economies of scale ■ Services charged out to recover fully loaded costs ■ Objective to reduce costs and standardize processes

Mandated services

Marketplace ■

Includes professional and advisory services ■ Separation of governance and service functions ■ Services charged out to recover fully loaded costs ■ Objective to reduce costs and improve service quality

Voluntary services

Advanced marketplace ■

Client choice of supplier ■ Market-based pricing ■ Possible external sales if surplus capacity ■ Objective to provide client’s choice of most cost-effective supplier

Voluntary services

Independent business ■

Separate business entity ■ Profit is retained ■ Multiple organizations as clients ■ Objective is to generate revenue and profits for service company

Voluntary services

Source: Quinn et al. (2000)

At its most basic, the move to shared services involves the consolidation of transactional processing and administrative work. Services such as payroll and accounts payable are typically mandated services in that business units are not allowed to go out and source their own payroll for example. This trend to consolidation and away from decentralization is evident in global companies with multisite operations. According to Quinn et al. (2000), in basic shared services the predominant drivers are cost reduction through economies of scale and the standardization of processes, as well as a focus on client service. What differentiates shared services from the simple consolidation of transactional services is the focus on the client. Shared services must start from a client vision – of what benefits will accrue to the client and what will satisfy them. From the outset it is important to recognize that each organization will have to discover its own route to an efficient shared services architecture. The idea of a single best practice approach is at best naïve and at worst dangerous to the organization’s health. What works for one firm will not necessarily work for others.

Consolidation at a single lower-cost location While shared services consultants and writers are always keen to point out the differences between centralization and shared services, for many organizations the consolidation of dispersed finance activities is often a substantial achievement in

5

Shared Service Centres

itself. The purist shared service centre advocates may be offended by what they see as a half-hearted approach, but those who understand the culture and dynamic of organizations are well aware of the need for change to be sometimes iterative and considered. The relocation of a finance staff from a large number of dispersed locations is often the first step in the move towards a more conventional financial shared service centre (FSSC) approach. In many cases expansion over time has led to a dispersal of finance staff across a number of sites and this creates problems in terms of co-ordination and communication. As an initial step, bringing staff involved in finance activities together in a single location can be a major improvement. While this approach is not strictly a shared services setting, elimination of the historical fragmentation of staff and processes can be very valuable in itself. In addition, it is an effective way of freeing up the expense of fixed assets/real estate in high-cost metropolitan locations in favour of lower-cost more accessible locations.

Bringing staff from several different finance organizations together at a single location This conventional approach to shared services involves taking staff from finance functions across different sites/locations and putting them together at a single location. This approach is usually modelled on the experience of multinational corporations that bring finance staff from around a region such as Europe to a single low-cost tax-efficient location. In the case of public sector organizations shared services often involve bringing staff from functions from around the country to a single location. Part of the FSSC processes are often reorganized or redesigned to improve efficiency and new technology platforms are put in place. In addition, the move to the SSC will typically involve the migration of finance systems from a number of different legacy systems to a new enterprise resource planning (ERP) platform. The main benefits of this approach are savings in terms of staff costs, fixed assets and IT costs. Under this approach the SSC remains part of the existing organizational structure and has limited independence. Costs are typically allocated back to the client units. In many cases staff who previously carried out the transaction processing are offered the opportunity to move to the new location.

A new organizational entity with its own mission The radical change model of finance services is often associated with a dramatic restructuring of the underlying body it serves. In many cases the setting up of a new unit or the amalgamation of a number of existing units provides the opportunity to radically rethink the provision of supporting finance services. In these cases a new

6

Shared services: It’s not just about cost saving

location, new staff, new IT platforms and new processes such as e-fulfilment are introduced in parallel with the new emerging organization. The SSC will typically have a clear independent mandate of operation and will normally recruit a substantial number of new staff.

The virtual shared service centre The virtual shared service centre involves the use of ERP and other technologies to connect staff in different locations and thus avoids the need to move staff to a central location. While still the exception, the evidence from private sector organizations is that virtual SSCs are difficult to operate in practice. In particular the absence of regular face-to-face contact can lead to a lack of cohesiveness and problems of coordination among staff at different locations. In addition, a number of organizations have found that the enabling technologies such as intranets, video-conferencing and so on have not lived up to expectations. Though the virtual model conjures up images of technology-enabled knowledge workers in different locations interacting in real time, in reality the virtual SSC is often a compromise solution based on the reluctance or inability of the organization to move to a new location.

Outsourcing Under this approach a private contractor provides the services which were previously provided in-house. Though traditionally associated with IT services, the model is beginning to become popular in the area of financial processes and there is no shortage of firms willing to take on public sector work. Recent research (Andersen/akris.com survey, 2001) found a number of clear trends in the type of shared services being set up. ■

North American parent companies still account for the highest proportion of organizations involved in shared services – with 38 per cent of parent companies but only 26 per cent of shared service centres located in North America.

■

There is a growing proportion of shared service centres in Asia Pacific (11 per cent), South America (6 per cent) and eastern Europe (5 per cent) – with increasing geographical distance from the parent companies’ region of origin.

■

While shared services is clearly on the up, most shared service centres are comparatively young – only 41 per cent have over two years’ experience. We can expect the number of shared service centres to continue rising, with a healthy 23 per cent of the survey respondents now in the discussion or planning stages and an additional 18 per cent in their first year.

7

Shared Service Centres

ORIGINS AND RATIONALE FOR SSCs There is often much scepticism among European management that the potential prize does not match the undertaking of major back office restructuring or reengineering as the back office overhead is typically a relatively low proportion of a company’s total base cost. This is, however, unjustified scepticism as the opportunities for a sustainable reduction in an organization’s cost base can be significant and wide reaching. The most obvious opportunities for companies come from eliminating non-value added activities such as multiple authorization processes and reconciliations. The organization can gain economics of scale and improved productivity by consolidating and centralizing repetitive or transaction-based activities. By leveraging of panEuropean or global purchasing powers and by redesigning processes, companies take advantage of technologies and leading edge practices and focusing staff efforts on providing a better quality of service to customers both external and internal.

Dispersed services are costly and inefficient and don’t work By adopting a shared services policy, companies have demonstrated typical savings in the 25–30 per cent range, rising to 50 per cent in some cases. But equally important is the improvement in service to internal business units. The luxury of having identical services in every business unit and operating company is a cost that most companies simply cannot afford. For years, staff groups have vacillated between centralization and decentralization. Business units unhappy with service from the corporate centre have been duplicating services and functionality, in some cases just to survive. So, corporations have ended up with multiple human resources, finance and information technology functions which is costing the enterprise far more than it should be spending, given little evidence of increased value. The myth of decentralization is that service must be better. Maybe or maybe not. A business case can be made to clearly demonstrate improved service levels, not just reduced costs through a consolidated centre. Faced with the facts, individual business units will still argue to retain control. This leads us to suggest that objections are often motivated by the need for control. Most organizations cannot sustain the duplication from distributed staff groups. It is folly unless an organization has unlimited operating expenses. Operating companies believe they get better service from their own staff groups even though there is no economic rationale or demonstrated service improvement for the strategy. Most staff functions spend a disproportionate amount of their time on routine and transactional type activities such as paper processing and administration at a time when technology and opportunities to leverage volume and scale abound. This has been well studied in the finance function where it is well known that

8

Shared services: It’s not just about cost saving

most financial groups spend as much as 65 per cent of time and resources at the transactional processing level. Transactions are budget consuming when you consider the sheer volume of activities such as accounts payables, receivable, travel and expense reporting, payroll, credit and collections, general and cost accounting. Quinn et al. (2000) observe that these transactional activities are often snidely referred to as low value added while risk management is seen as strategic and value added. The issue for chief financial officers, according to these authors, is rooted in the need to do both the transactional and the strategic functions very well. Transactional processing is key to a smooth running organization. Just see what happens when pay cheques are not issued or suppliers are not paid on time! The domination of transactional processing equally applies to other staff functions such as human resources, information technology and supply chain functions. In looking to the future, staff groups need to look closely at how best to deliver at both the transactional and the strategic level. ‘Consolidation is a minimum to capture benefits from economies of scale’, they say.

Shared services does work The most important business driver for shared services is cost savings. And it appears that most companies translate those savings into a significant return on investment (ROI). In fact, research by the authors reported an average ROI of more than 30 per cent. The average reported headcount reduction of 25 per cent clearly helped to achieve these returns. In addition to a healthy ROI, companies reported additional benefits from implementing shared services. Many cited a significant improvement in customer satisfaction. One high-tech executive argued that shared services gave his company greater flexibility and increased responsiveness to support core business units and the increasing pace of change those business units must face. Another executive went so far as to state that the efficiency of his company’s shared services organization proved to be a key strategic consideration in supporting a recent takeover bid. The research found that ‘in addition to a healthy return on investment, companies reported additional benefits from implementing shared services. Many cited a significant improvement in customer satisfaction’. More recent research by akris.com confirmed these findings (see Figure 1.3).

SSCs give internal clients choice Establishing a shared services unit allows internal clients to choose the type, level and quality of services they want at a price they are willing to pay. The service providers, on the other hand, can charge an appropriate fee for their services,

9

Shared Service Centres

building in all the associated costs including overheads. Internal clients pay the true cost of the services they receive, just as they would if they had gone to an external service provider. This means, however, that the shared services unit must match external performance levels or at some point clients will exercise their right to use alternative suppliers. Shared services needs to operate like any other business, delivering services that clients need and are ready to pay for at a cost, quality and timeliness that is competitive with alternatives. Employees of shared services know that they are crucial to the overall success of the ‘team’ and its business objectives, whereas before they may have been considered a ‘necessary evil’ tagged on to each business unit. Fig. 1.3

Savings from SSCs – planned and actual Planned savings: SSCs not yet in operation (%) 0–10% 17 10–20% 22 20–30% 43 30–40% 13 40–50% 4 +50% 0 Savings: SSCs in operation (%) 0–10% 11 28 10–20% 31 36 20–30% 46 26 30–40% 8 6 40–50% 4 4 0 +50%

Source: Andersen/akris.com survey (2001)

It works in not for profit organizations too The concept is not restricted to the corporate world and is increasingly being put into practice by forward-thinkers in the public sector. The principles of shared services operations have been adopted for example in the health-care sector, to reap the benefits in minimizing costs and avoiding duplication of activities. Quinn et al. (2000) cite groups of independent hospitals, for example, which are pooling common services, even though this requires an unprecedented level of discipline, efficiency and co-ordination. Far-sighted administrators have recognized

10

Shared services: It’s not just about cost saving

the economies of scale in pooling human resources, food services, laundry services, accounting systems and lab services, for example. National and local government organizations worldwide are also adopting shared services as a means of providing greater value for money for tax dollars and increased accountability.

It works beyond finance As Table 1.2 illustrates, the scope of shared services need not be confined to accounting services. Table 1.2

The scope of shared services Transactional and administrative

Professional and technical

Finance

Accounts payable/receivable Payroll Credit and collections Customer billing Travel and expenses Tax filing and reporting General accounting External reporting

Financial analysis Business case support Capital planning Business analysis

Human resources

Benefits administration Pension administration Salary administration Employee records Claims Employee enquiries Job evaluation

Labour relations Organizational development Training and development Compensation and rewards Advisory services Health and safety

Information technology

Data centre operations Network services Maintenance Help desk Data support

Application development Application architecture Software/hardware installation Strategy and training Telecommunications

Supply or support

Administrative support (includes: reception, clerical, secretarial) Travel arrangements Mail services Microfilming Fleet

Purchasing and warehousing Real estate Material management Logistics and distribution Facilities management Public affairs Communications Graphic services Legal services Security services

Source: Quinn et al. (2000)

11

Shared Service Centres

Financial transactions still account for the majority of services provided by shared service centres. However, IT, HR, legal and facilities transactions are increasingly being processed in shared service centres too. The rise of e-procurement and customer relationship management (CRM) is expected to have a big impact on the centres’ services and technology. In particular, e-procurement is expected to offer real opportunities to reduce back office costs.

It works because firms make it work Research has identified other reasons for the growth in SSCs. The top four reasons are given in Table 1.3. Table 1.3

Top four reasons for the growth in SSCs (%)

Reduction in general and administrative costs

53

Better service quality, accuracy and timeliness

53

Standardization of business processes

48

Optimization of working capital

42

Source: Andersen/akris.com survey (2001)

SSCs provide a means to employ lower paid people who specialize in data entry and transaction processing, to reduce the amount of management required to deliver a quality service, to improve productivity and to standardize processes across operating sites. While costs are often a key driver, the overriding priority is normally to take the routine transaction processing away from local controllers allowing them to focus on supporting the business. The emergence of the Single European Market reinforces these savings by providing strategic arguments in favour of a co-ordinated European structure. As companies extend their presence across borders the European market is changing, through mergers and acquisitions or organic growth. Through the convergence of fiscal, legal and tax regulations and the introduction of the euro, Europe is becoming more homogeneous. It is becoming increasingly illogical to maintain a duplicate infrastructure within each country of operation and the improvements in the functionality of IT software make geographic location irrelevant. The SSC approach allows common standards to be applied across local markets thus enabling the local finance function to concentrate on offering value added support to the business. With a decentralized accounting service, poor integration between systems or inadequacy in current processes and systems usually results in a large number of manual checks and spreadsheets. Under an SSC the opportunity exists to eliminate

12

Shared services: It’s not just about cost saving

these activities by redesigning operational processes and by introducing modern integration systems which contain built-in checks and provide exception reporting to bring discrepancies to management attention. Since new systems will often be necessary to facilitate sharing or centralization of services, the elimination of these activities can be an added bonus. One of the main questions organizations ask when considering back office restructuring concerns the legal and fiscal restrictions on processing accounting transactions outside the country in which the transaction took place. In the past the anti-centralization lobby put forward these restrictions as one of the main reasons why shared services would not work. However, many organizations have put pressure on governments and tax authorities to relax restrictions. The emergence of the euro has provided further impetus in this area. Some countries can limit the freedom to perform all accounting tasks outside the country. However, precedents have been set for establishing shared service centres and minimizing, if not eliminating, the flow of paperwork back and forth to the legal entity. The savings from consolidation can be enormous. Local offices tend to have generalized accounting staff performing both analytical and transactional tasks. Through the SSC the opportunity exists to: ■

employ lower paid staff to specialize in data entry and transaction processing;

■

reduce the amount of management required to deliver a quality service;

■

improve productivity;

■

standardize processes across operating units and across countries;

■

obtain consistent and comparable information across operating units, countries and business systems.

In addition to the operational savings, the potential tax savings can be considerable. Some countries such as the Netherlands and Belgium have introduced specific tax regimes to encourage shared services activities. Many firms are now using a commissionaire structure to achieve these tax savings. Under this concept sales are made by a central unit, which then pays the local sales organizations a commission. With this structure it is possible to net off the group’s profits and losses, and to move more of the profits to a low tax regime. Furthermore, shared services allows greater connectivity across the organization and throughout the supply chain. Limited labour pools and changing skill bases no longer need to be a deterrent to entry either globally or domestically. The organization does not have to worry about staffing business units already handled by its shared service centre and can instead direct all of its attention to staffing the core business functions critical to those business units. As markets become more transparent and investor demand for information increases, corporate performance measures become more important than ever. These

13

Shared Service Centres

measures are often difficult to obtain enterprise-wide due to lack of standardization across business units. An integral part of shared services is reliable, cost effective performance metrics. As in standardization, shared services seeks cost reduction and efficiency. However, unlike standardization, cost reduction is not the only driving force. Shared services involves a redesign of personnel, process and technology, and a realignment of organizational structure. This is all done with the objective of enhancing value and improving service levels while all the time reducing costs. It is also an ideal springboard for implementing enterprise-wide software systems. Shared services creates strategic value in two other ways besides capitalizing on economics of scale. First, the information which is now captured through the internal customer–supplier relationship can develop new ideas for services and products. Practices constantly evolve as new technologies, ideas and ways of accomplishing processes are developed. Second, shared services gives the organization the flexibility to add new business units, assimilate acquisitions and expand geographically more rapidly than ever before. As it is exclusively a support function, it frees business units to focus solely on their core businesses and pursue new opportunities. Shared services is a value added strategy at heart. In the short term it requires an investment to enable its creation. However, this investment can pay off richly by: ■

freeing up capital for core business operations. By allowing companies to minimize their investment in incremental infrastructure, it enables the redirection of funds, which can foster expansion and growth of products and markets.

■

accelerating and renewing processes. By streamlining processes and locations, companies can reduce business risk. Shared services allows companies to bypass the infrastructure-related risks of operating in emerging markets.

■

hastening the delivery of services and products.

■

improving information flows and increasing the knowledge asset. It increases knowledge through information standardization and connectivity all along the value chain of an organization. The depth and quality of the data unleash enormous possibilities for enhancing customer and supplier relationships and interdependencies.

■

enabling quick market development and post-merger integration, even reaping revenues from serving external clients.

■

freeing senior staff to focus on strategic and analytical functions.

■

leveraging shared infrastructure. This enables quick market development and postmerger integration. Acquisitions become economical because with shared services there is no need to pay for technologies and processes that may in the long term be discarded. Organizations only pay for the core competencies they want as reliable information and consistent performance measures are already in place.

14

Shared services: It’s not just about cost saving

WHIRLPOOL – AN EARLY PLAYER IN SSCs Whirlpool Corporation is one of the world’s leading manufacturers and marketers of major home appliances. Its headquarters are in Benton Harbour, Michigan in the USA. Though now a global leader, the company began as a family-owned machine shop located in a small town on the eastern shore of Lake Michigan. The company manufactures in 12 countries, has over 30 000 employees and markets products under ten major brand names in more than 140 countries. Annual sales now surpass $8 billion and continue to grow as the company expands its current lines of business and seeks opportunities in new ventures around the world. In 1994, Whirlpool examined its finance strategy and realized that: ■

the dynamics of the major domestic appliance business in Europe had changed dramatically;

■

the winners would only be those who are able to operate at a pan-European level and who are able to provide business support at the lowest cost per unit.

Whirlpool’s response to this changing market was to announce that the new organization would focus primarily on processes and not on local geography. Finance and administration’s response to support this new organization was to: ■

create a finance and administration organization that would support and add value to all areas of the business;

■

keep business planning and analysis close to the business;

■

outsource non-core activities such as payroll, travel and fleet management;

■

centralize at a single European location all transaction processing activities.

The main aim was to create competitive advantage both in services and cost for the finance function. To meet these goals it needed to separate the basic cost adding transaction processing from business planning and analysis, which is the key value adding role for finance going forward. It also needed to enhance the analytical skills of the business planners to more effectively support the business and at the same time dramatically reduce the cost of the overall service. Finance had to become better aligned to supporting the information needs of the business. Issues to be resolved included: ■

volume of reports: too much data and too many reports;

■

clarity of information: data was being supplied, not information; recipient had to interpret reports; data definitions were inconsistent;

■

variance analysis: a confusing morass of profit measures; full profit and loss reports drowned the key variances;

■

exception reporting: multiple potentially contradictory benchmarks, which performance benchmark to use, plan, forecast, prior year;

15

Shared Service Centres

■

context of information: insufficient data to identify trends in performance;

■

future vision: concentrated on historical information with little future vision;

■

focus of information: did not pinpoint problems;

■

level of detail: too much unnecessary information with insufficient focus on areas for concern and investigation.

Senior Whirlpool management agreed that there was a need to give the business what it wanted – headline news with fewer pages, clear signposts to problems, good news distinguished from bad, trend analysis, predictive data and timely information. The future vision was that business planning analysis and control will be the key value adding role in the support of the business. Whirlpool Europe benchmarked itself against its counterpart in the USA, NAAG (North American Appliance Group). The centralized NAAG finance and administration function required 33 per cent fewer staff than the decentralized European structure. Based on the above it was agreed that major savings could be derived in Europe by consolidating and centralizing transaction accounting. It was also agreed that the best companies were predominantly US multinationals operating in Europe. Companies at the leading edge in finance are those with strategies towards shared services, and in the area of shared services in Europe there was little to emulate. One of the main benefits which Whirlpool derived from changing to a shared services strategy was to realign its finance strategy. The centralized North American Appliance Group (Whirlpool’s US operation) required around 20 per cent less finance and administration staff than the decentralized Whirlpool Europe structure. All additional staff in Whirlpool Europe were involved in the area of transaction accounting. The business planning and analysis functions in the USA represented around 40 per cent of the total finance and administration staff but only around 20 per cent in Europe. Whirlpool realized that as a US multinational in Europe it encountered wide ranging threats and opportunities. Whirlpool believed the additional benefits of moving to a single centre were greater than operating from a series of regional centres. However, these benefits had also to be weighed against the increased complexity and difficulties of implementation, as well as the political considerations associated with the reduction in staff numbers and power in each of the countries where those functions and activities were currently located. After a period of meticulous planning, Whirlpool opened a shared service centre in Dublin in September 1995 which took over work from 14 different finance operations in western Europe. What made Whirlpool’s case particularly fascinating is that it chose a big bang approach to reform transferring existing accounting and finance practices to a single location in a relatively short space of time. This challenged conventional wisdom which said that it is better to reform existing finance practices at country level first before transferring them to a single centre, otherwise organizations may end up centralizing bad habits as well as good ones.

16

Shared services: It’s not just about cost saving

The next step was to decide where to locate. Should it be in a place where the firm already had an existing site or should it be a greenfield operation. In the end the team opted for a greenfield site. It appointed Ernst & Young, the consultancy firm, to assist in finding a location offering a pool of skilled labour, excellent telecommunications infrastructure and suitably priced property. At the end of March 1995 the project team pulled together all of the company’s financial controllers and human resource representatives from across Europe for a workshop to explain what the shared services project was all about. The following month the team carried out a series of road shows across Europe to explain to country heads the likely impact on their organizations and to enlist their support for change. This exercise had two crucial goals: ■

to enlist local support. The co-operation of the national human resource staff was needed in order to identify which local staff would have a job in the future and which staff needed to be persuaded to stay at least for the transition period.

■

to manage expectations. Rather than selling the project as something that would revolutionize the finance function overnight, the team simply promised that, after migration of the relevant activities to the shared service centre, the service provided would at least match that which the local country organizations were used to and there would be no disruption to the business.

The main task now was to identify a site for the centre and enlist a recruitment team to anticipate staffing requirements. They also drew up a timetable for migrating the national finance operations to the shared service centre. Planning and analysis and factory administration would remain local. For convenience this schedule was identical to the IT department’s timetable for switching each national Whirlpool organization to a new European-wide area network. In June 1995, Ernst & Young proposed Dublin as a suitable location and this choice was quickly endorsed by Whirlpool Europe’s senior management. Thirty staff were hired to fill the most important positions. A lease was also signed on a building, and in order to link the shared service centre to the rest of the organization a local area network was set up. After the initial induction course in Dublin which lasted four weeks, the centre’s new recruits, about half of them Irish, were sent out to workshadow people whose jobs they were assuming. In countries such as France and Germany, where the company had big operations, they stayed up to five months to ensure that the company did not lose essential local expertise. People said there was a risk of centralizing bad as well as good practices. However, this was limited due to the fact that the centre was structured on a functional and not a country basis, one group handles accounts payable and this is further divided into processing and disbursements. One handles the statutory and fiscal accounting, another the general ledger management and the fourth fixed assets, intercompany and inventory. This allows

17

Shared Service Centres

staff covering different countries to compare and identify best practices and implement these companywide in the centre. As the company’s finance centre is under one roof, it is easier to train and utilize the most up to date technology. The main services which are covered in the Whirlpool SSC are: ■

general ledger accounting;

■

disbursements;

■

fixed assets/inventory accounting;

■

reporting consolidation;

■

VAT and intrastat;

■

statutory/fiscal accounting;

■

accounts payable processing.

THE AIMS AND OBJECTIVES OF SHARED SERVICE CENTRES There are a number of principles that are essential for shared services success. The following are those that we usually recommend the leader seek endorsement for at the beginning of implementation: ■

there will be no duplication of services in business units once the service is designated as a shared service;

■

services will be charged at a rate to cover fully loaded costs;

■

governance-related activities will be paid for by the executive;

■

during an initial grace period (18–24 months) shared service functions will have exclusive supplier status;

■

following the grace period, decisions to outsource services will be made in the best interest of the corporation and will be based on a business case analysis;

■

business units have a joint accountability with the shared services organization to reduce operating costs and ensure the success of shared services;

■

the shared services organization will benchmark its costs with external best practices and will gather internal client satisfaction feedback;

■

the shared services organization will report annually to the corporate executive committee on costs and satisfaction level;

■

line management accountability will shift.

It is important to recognize early on that the shared services approach is very different to centralization. As Table 1.4 indicates, the role of shared services is to provide products and services at a cost, quality and timeliness that meets the needs

18

Shared services: It’s not just about cost saving

of the internal client and is competitive with alternatives. As such, shared services should enable the internal client to select services and service levels based on what they want. Table 1.4

An SSC is different to centralization

Attribute

Shared service centre

Centralization

Orientation and accountability

Business units

Corporate

Key performance targets

Service excellence and continuous improvement

Cost reduction and central control

Use of key performance indicators, service level agreements, service costings

Widespread

Rare

Likely location

Neutral location separate to corporate business unit

Corporate

Classification

An independent unit

Another corporate function

Run by

An entrepreneur

An accountant

Source: Andersen/akris.com survey (2001)

ISN’T THIS LIKE OUTSOURCING? Outsourcing the administrative function is a realistic option at any time in the process of establishing shared services. Some organizations may see outsourcing as the only option as they do not possess the skills or resources to create effective shared services in-house, or they wish to avoid the inevitable disruption implementation can cause. In the context of existing shared services, outsourcing can be viewed as the ‘third’ phase. Having decided to create internal shared services (phase 1) and followed through by implementing best practices (phase 2), some shared services operators realize that they will never be able to reach the standards of world-class operations in certain of their activities. Outsourcing parts of shared services operations becomes a viable alternative (phase 3). The decision to outsource administrative and support activities is being taken by forward-thinking managers who question how work has traditionally been carried out and whether there is a better way of doing it. The availability of a new breed of dedicated, third party suppliers and complementary information technology (IT) makes outsourcing an increasingly attractive option for some. Many companies now outsource non-core and/or non-strategic activities – such as finance, human resources, legal and administrative processes – to third parties.

19

Shared Service Centres

These operate their businesses along shared services lines to provide services economically to several client organizations through sharing people and resources and by implementing common processes and systems. The conclusion many managers reach when they realize they need to trim overheads and eliminate inefficient internal service units is to outsource. They see moving the problem out of the organization as the most prudent and easiest course of action to end interdepartmental disputes, poor service and ‘unreasonable’ costs. Even after more than a decade of restructuring, corporations are still pursuing the gods of efficiency and ‘right-sizing’. The decision to outsource can seem enticingly easy: just let someone else do it. Implementation can be complex and always impacts people and strategy. But in many cases, it may be the wisest alternative. Business process outsourcing (BPO) is becoming a key element of many shared service organizations. akris.com found that a substantial number of survey respondents are either currently outsourcing a business process or will consider outsourcing in the near future. Because many transaction-intensive business processes – such as payroll, accounts payable and employee benefits – typically fall within the scope of shared services, it is natural to consider outsourcing as a more efficient and effective way of providing these functions. That said, outsourcing is best considered after the shared services organization is operational and the data exists to support objective decision-making capabilities. That’s why companies with relatively mature shared services organizations are more likely to outsource business processes than companies that have recently implemented shared services.

A GOOD SSC TAKES TIME AND RESOURCES TO ESTABLISH One of the key issues which firms must consider regarding the move to the SSC is how fast or slow to proceed towards a fully centralized structure. The evidence to date suggest that the speed of transition is very much contingent on the organization in question. In particular, the number of sites involved, the level of integration of the existing IT platforms and the climate for change are all factors that must be taken into account when deciding the pace of change. What is clear, however, is that the likelihood of a successful transition to the SSC model is substantially improved when a structured transition/migration plan is put in place before the project begins. Cost is often a primary driver for establishing an SSC, but respondents to research surveys rated service quality equal to cost reduction in the top reasons for setting up SSCs. Experience shows that organizations focusing implementation solely on cost reduction end up with poor service quality SSCs, which are more

20

Shared services: It’s not just about cost saving

expensive to operate than a higher service quality alternative. The cost of rework is much higher in an environment where there is little focus on performance measurement, service level agreements (SLAs) and service costing. People do not enjoy working in an environment where there is little focus on determining and meeting customer needs. The cost of hiring and training additional staff in an SSC with high staff turnover again ensures that in the end it becomes a very expensive option. As shown in Figure 1.4, respondents to an akris.com survey voted the greatest implementation risk to be poor quality service (62 per cent). Service concerns are closely followed by the risk of low employee support. This reinforces the need for senior management commitment and effective change management to increase employee buy-in and secure co-operation during and after the creation of an SSC. Experience suggests it pays dividends to ensure maximum support for the SSC project before design and implementation are started. This may take a while, and may require the involvement of more people in the initial stages of the project than may be felt necessary. But by involving people and ensuring they have an opportunity to have their views heard, there is likely to be much less resistance at the implementation stage and after ‘go-live’. The key critical success factor is a clear vision, strategy and support from senior management. Support from senior management is a must as this type of project cuts across the power base of the organization and whenever one set of responsibilities is moved to another location, there will be resistance. When this resistance comes there is a need to have senior management support to ensure that the project moves forward. Fig. 1.4

The greatest risks in setting up an SSC (%) 62 Poor service quality 58 Low support by employees 34 Severe business disruption during implementation 33 IT problems 31 High implementation costs

Source: Andersen/akris.com survey (2001)

In the next chapter we will explore how to build this vision and capability.

References Quinn, B., Cooke, R. and Kris, A. (2000) Shared Services: Mining for Corporate Gold, Harlow: Pearson Professional Education.

21

2 Shared service activities

■

Introduction

■

If the future looks like anything it looks like Oracle shared service centre 26

■

Some lessons learned

■

Conclusion

25

31

33

23

Shared service activities

INTRODUCTION The choice of which processes or knowledge-based services a shared service centre will support is dependent on a number of factors including the degree of standardization of processes across the business units, the willingness or ability of business units to ‘outsource’ processes to another part of the organization, and how uniquely specialized the skills required to perform an activity are (see Table 1.2 on page 11). Under the SSC approach the use of dedicated resources to operate key processes or provide knowledge services enables increased efficiencies within the processes through economies of scale and standardization. The concentration of these activities also releases business unit managers to focus on more value added activities rather than the management of administrative processes. Research has identified three basic types of SSC activity. ■

Transaction oriented activity: An SSC could be defined by transaction (e.g. a company could centralize all of the customer invoice processing to an SSC, but could leave all of the rest of the transactions within that module in the local country). In this example customer management, customer receipts and collection transactions remain in the local country. In this type of implementation, the scope of the SSC is clerical entry, and knowledge-based activities are done in a decentralized fashion.

■

Functional area activity: An SSC could be defined by functional area or application module (e.g. a company could centralize all of the accounts receivable processing to an SSC, while leaving accounts payable and general ledger in the local country). All of the transactions would be processed by the SSC, with the other functions being carried out locally. In effect, the SSC deliverable would be the journal entry at the end of each month.

■

Value chain activity: An SSC could be defined by value chain or process (e.g. a company could centralize all of the transactions for a particular process, perhaps order entry and accounts receivable modules, centralizing the order to collection process). The advantage of this type of activity is that all transactions for a particular process are carried out in one place, unlike the transactionoriented activity or functional area activity in which transactions will almost certainly be in a different country or facility. In this type of implementation, the focus of the SSC includes knowledge activities such as supplier negotiation, open to buy management and financial analysis.

In the 1980s firms looked to the SSC model as a way of gaining efficiencies through centralization at low-cost locations. Today firms are using SSCs to redefine the way they do business (see Figure 2.1). In particular, firms such as

25

Shared Service Centres

Oracle are using their shared services to redefine their core business processes to create shareholder value through increased value to customers. Fig. 2.1

The changing face of shared services, 1980–2002

BP Amoco outsources entire HR function Move to global SSC structure – American Express, Ciba-Geigy, Bristol Myers Squibb

1988 – GM begins consolidation of 100 sites into single Finance SSC

Allergan incorporates customer services into its pan-European SSC

Launch of pan-European SSCs by Intel, Whirlpool and Allergan

Tenneco launches SSC for finance, HR, MIS and payroll 1993 – Allied Signals achieves $40m annual savings from finance SSC General Electric, Ford, Baxter Healthcare set up SSCs in the USA 1980s 1990s Profit centre autonomy ■ High cost, redundant technology ■ Anecdotal customer service ■ Poor productivity

2000 – Over 50% of Fortune 500 now using SSCs

Shared services

2000s SS Plus

■ Low cost ■ Flexible client server technology ■ Measured productivity ■ Service orientated/client driven

■ Not centralization but operates as a business

?

IF THE FUTURE LOOKS LIKE ANYTHING IT LOOKS LIKE ORACLE SHARED SERVICE CENTRE Back in 1998, Oracle realized that it really didn’t have a global structure to its operations: ■

there was no common price list;

■

marketing strategies differed and were reinvented country by country;

■

client-server business systems differed from one another and were supported by inconsistent business processes – both customer-facing and those in the back office;

■

information was fragmented and not shared from one business unit to another resulting in significant duplication of work.

26

Shared service activities

As part of its global SSC strategy, Oracle established a network of three shared services worldwide in Dublin, Sydney and Rocklin (California). The SSC in Dublin serves 40 countries and provides a range of services. The centre is truly international employing in excess of 320 staff from 25 countries. With its strong focus on knowledge intensive processes, graduates make up almost 40 per cent of the headcount. As might be expected the centre makes full use of the range of Oracle e-business applications in delivering service to the EMEA region. The strong customer service orientation of the SSC is reflected in the matrix structure around customer facing processes which SSC management team have put in place. Oracle chose to implement shared services not only for cost savings but also to achieve globalization of business processes, improve internal controls and become more competitive in support of the e-business strategies. Shared services was the right decision for Oracle due to: ■

standardization of processes;

■

reduction in IT support and development costs through use of standard applications and standard module set-up;

■

reduction in finance and administration costs through efficiency improvements;

■

faster assimilation of new technology;

■

consistent management reporting across countries;

■

adoption of the best practice across countries;

■

creation of one company approach – achieve business partner roles with internal and external customers;

■

provision of a world-class reference site of Oracle financial applications;

■

achieve its vision of becoming a world-class finance organization.

One reason Oracle’s shared service centre, i.e. its three centralized back offices servicing the Americas, Europe, the Middle East and Africa, and Asia Pacific, has been so successful is that it is part of a much broader global strategy to move the entire business into an e-business model. Therefore, it has been strategically directed, masterminded and sanctioned from the very top of the organization. For Oracle Shared Services the challenge was to move from multiple systems, processes, locations and structures to a unified shared services structure (see Figure 2.2). The Oracle SSC approach is unique in a number of aspects:

Standard processes Oracle took the time to standardize its business processes. Each business process had an executive (vice president) sponsor ensuring business acceptance. The

27

Shared Service Centres

processes were built with the assistance of third party consultants who were objective and brought a skill set not necessarily existent within Oracle. Andersen were chosen not only because they were Oracle’s worldwide auditors at the time but also because they were specialists in this area and could draw upon other experiences which helped Oracle understand the appropriate design for themselves. Users from all over the company spent months with the processes as Oracle looked for a common global fit. Once Oracle agreed on the business processes, it mapped these to the latest version of Oracle’s E-business suite. Nicky Sheridan, of Oracle, describes what happened next. Before rushing off to implement the pilot country, Hungary, Oracle undertook four months of integration testing, i.e. they went back to all the geographies and vice president sponsors involved in setting up the processes and they used test packs (transaction examples) and scenarios from all over the globe to ensure they had a sound global fit to the model solution. Oracle believes that all companies should implement the product Vanilla, i.e. without customizations, and this is one of our secrets to success. Customizations are not only expensive to support and make upgrades more difficult, they also move us away from the global standard process that e-businesses rely upon to be successful.

Fig. 2.2

The path to shared services

Implementation dimensions Multiple systems

Multiple processes Define processes

Move to one system Rationalize systems

Commonize policies

Move to one database

Commonize processes Shared services

One location

One organization per process

Consolidate within region Consolidate within country Multiple locations

28

Separate from business units

Multiple organizations

Shared service activities

Oracle Hungary went live with all the related processes and system in June 1999. Since then all of EMEA subsidiaries have been migrated to the SSC.

Self-service The applications deployed in the SSC are not just Internet-friendly, requiring only a browser to access them from anywhere, but they are also built around the self-service concept. This allows Oracle to achieve significant benefits, since employees prepare their own requisitions and expenses claims directly over the web. The HR database knows exactly what approval limits exist and direct the requisition or claim up the HR hierarchy to the person with the appropriate approval limit. Purchasing works the same way with the catalogue of available goods and services all in the system so purchasing is literally system-controlled and allowing purchasing departments in countries to concentrate on leveraging strategic purchasing relationships. Instead of asking HR administration departments to make themselves aware of all employee details, including those that change such as their home addresses, employees enter their own information. This is much more accurate since there is no ‘noise’ in the communication. Through Oracle iStore, customers and partners can order their own software directly on the web. Suppliers too are web-enabled by having their sales catalogues and price lists in the purchasing system. So customers, partners, suppliers and employees are all linked to the standard Monaco system and can enter and access information as Oracle sees fit. The model is extremely efficient and has helped Oracle knock more than 30 per cent of its finance and administrative cost base, and the number continues to rise.

Lights-out processing While shared services have been traditionally used to maximize the efficiency of repetitive transaction processing, Oracle SSC has used the move to the SSC approach as an opportunity to eliminate and remove many manual tasks. Technology advances in Oracle’s E-business suite, the development of Extensive Mark-up Language (XML) and various associated protocols, and the relaxation of some legal requirements for documentation have enabled the SSC not just to improve the efficiency of their manual transaction processing but to eliminate some manual transactions altogether. This approach has delivered a number of benefits including: ■

lowest possible transaction cost;

■

reduced overall function infrastructure costs;

■

zero error rates;

29

Shared Service Centres

■

lights-out processing allowing 24/7 operation;

■

improved service levels.

Leadership and performance improvement Selling the new shared service model to the business and all its employees is never easy. Indeed people require more time and energy to agree the changes than to make the changes to processes and technology, which is easy by contrast. However, because Oracle’s changes have been driven by Larry Ellison, Founder, President and CEO as well as the CFO Jeff Henley, people have accepted them much more readily. While finance and administrative savings of more than 30 per cent have been enjoyed, the move to the new approach with its e-business model has much wider benefits. In order to continue to gain on tangible and intangible benefits, a shared services organization has to operate as a stand-alone entity. Oracle shared service centres are managed as follows in order to operate as a separate business: ■

resources are managed as a separate organization;

■

services provided are identified as the shared services products;

■

commitments are managed to comply with agreed service levels;

■

multiple partners or clients across the organization are serviced with a business partner’s mentality.

SSC separate businesses are continually revisiting and improving their current organizational structure, services and products provided as well as customer satisfaction levels. Oracle shared services currently runs various initiatives on performance evaluations. Shared service centres report a Balance Score Card by which senior management can measure shared service centre operations against the organization’s strategy and e-business.

Relationship management Oracle shared services manages the relationships with subsidiaries post ‘go-live’ at different levels. After a project implementation and during the first month end, service calls are scheduled once a week with the subsidiary finance director and shared services senior management, including customer service. In the following months the calls are scheduled at least once a month. The service call objectives of senior management are designed to:

30

Shared service activities

■

promote partnership between the shared services and the local organization;

■

prioritize pending processes and service levels issues from implementations and after ‘go-live’.

After the first three to six months of transition to the shared service centre, the call objectives change from dealing with issues/solutions looking backward to looking forward to bring about continuous improvements. After the six-month period, the SSC communicates goals achieved at this stage. Key performance indicators are reviewed to demonstrate the adherence to the service level agreements (SLAs). A review of the customer satisfaction surveys demonstrates the commitment of the centre to its customers and determines areas that require further attention and changes of customer requirements. The centre continues to promote communication of the line of business with outside partners such as customers and suppliers. This strengthens the business partnering relationship in an e-business environment. Building a team environment and business partnering, of both local and central management, help with the resolution of issues and provide opportunities to view and work on further steps to achieve efficiencies and effectiveness in an e-business environment.

SOME LESSONS LEARNED A senior manager within the SSC, points out that ‘Shared Service Centres require major organizational changes which can take time to implement. They can be very complex and often difficult. It is important to have a clear understanding of how a company can move towards a SSC in an organized, efficient manner.’ Oracle has some clear advice for those considering implementing an SSC.

SSC is a journey Setting up an SSC can be compared to a journey. A key element is to implement standard business processes across the organization for those services which will be handled by the SSC. Once these processes are standardized, migration to centralized processing can be accomplished. This facilitates moving forward with the classic Oracle approach of ‘best practices and business processes’. The second element involves centralizing identified processes for the types of activity that will be handled by the SSC. This may depend on the type of SSC that is desired (transaction, functional or value chain). In this stage, there is a central location for the functional use of the systems. It should be noted that the key

31

Shared Service Centres

feature of this stage is that the people staffing this solution can be located in a central or virtual location. The third element is common systems. In this stage, the same applications are used for all business units serviced out of the SSC. Common front-end applications allow batch entry of transactions across business units. Common data structures allow the free movement of transactions across business units. Although Oracle consider this an actual phase in the adoption of the SSC concept, it may actually be a prerequisite for a centralized organization. Entire enterprise visibility is a direct result of implementing common data structures.

Technology is an important enabler Prior to establishing standard processes in shared service centres (and similar to many multinational companies), Oracle’s information system infrastructure was symbolized by: ■

dispersed technology;

■

fragmented data;

■

customized systems.

With e-business transformations, SSC and global processes in place, information systems changes included: ■

centralizing and consolidating all IT

■

fewer, less complex data centres

■

a global single instance database.

Oracle has used its E-business suite and database solutions to provide strategic advantage to the SSC. The centralization of the management of the applications, while supporting the unique needs of the business, allows the SSC to recognize economies of scale and thus reduce operational costs. The streamlining of business processes encouraged by the concentrated system management supports the creation of consistent management information leading to better informed decision making. E-commerce and Internet trading bring both new opportunities and new challenges for the SSC. To take advantage of the opportunities and to be able to respond to the fast pace of business, Oracle needs to have instant access to worldwide information in a consistent format to plan business from product design through customer service. By leveraging technologies like business intelligence systems, Oracle SSC can obtain an enterprise-wide view utilizing integrated information across all applications. Additionally, they have the ability to summarize data for key roles in the organization and present information intuitively and simply.

32

Shared service activities

Training is essential Training played an important role in implementing the shared services project. Shared services and local countries organizations were trained in the following aspects: ■

systems

■

processes

■

behaviour.

New users at the shared service centre are trained in the global standard processes in conjunction with the utilization of recent applications. Customer service training and team building in multicultural environments has been provided. Also, SSC management conducted meetings with staff members to explain the SSC role and how it affects Oracle’s vision and to ensure that Oracle has provided the skills and behavioural knowledge to the SSC resources. At the local country level, process and systems training has been provided by shared services and the divisional process owners. Special importance has been given to the new business-partnering role of local finance, in which training is provided by the regional organizations. In addition the human resources group has provided change management support.

CONCLUSION Shared services brings together strategy, technology, process and people. To succeed in this area the organization must successfully harness all four together. The end result has the potential to bring employees, customers, intermediaries, partners and suppliers into a new relationship driven through e-business. For Oracle shared services the journey is well underway. For other firms there are valuable lessons to be learned from the innovative approach developed by Oracle, and for finance professionals there is the challenge of creating a shared vision of the future.

Footnote 1 Organizations who wish to obtain further details on Oracle IeBC including arranging site visits should visit www.oracle.com or contact (John F. Martin, ORACLE, East Point Business Park, Clontarf, Dublin 3, Ireland).

33

3 SSC – people, processes and systems

■

The need for strong foundations

■

The importance of information technology

■

The limits of IT – enterprise application integration

■

Emerging best practice in SSCs

■

Conclusion

37 40 47

49

56

35

SSC – people, processes and systems

THE NEED FOR STRONG FOUNDATIONS The American and now the European experience of implementing shared services demonstrates significant cost savings. Savings of up to 50 per cent have been quoted in the USA, while a 35–40 per cent saving is commonly quoted in Europe with an investment payback period of 18–24 months. The number of shared service centres worldwide is increasing, as are their responsibilities. Far beyond early attempts in the 1980s to centralize and streamline finance functions, today’s SSCs provide diverse services for multiple business units, including human resources (HR), information systems, legal, marketing, purchasing, research and development and finance and treasury. SSCs often provide these services across geographic, cultural and organizational boundaries. At the same time, the Andersen/akris.com survey spotlights a distressing trend: Nearly one-third of the survey respondents whose companies had constructed SSCs reported actual cost savings of less than 10 per cent. Although further research is needed to determine specifics, clues are provided in other findings from the survey: ■

nearly two-thirds of respondents believed poor service quality to be the greatest risk to implementing an SSC;

■

33 per cent of respondents felt that IT problems posed the greatest risk to setting up an SSC.

These concerns, coupled with the poor performance of many SSCs, are surprising given today’s increasingly networked economy. Many leading global companies have already completed first and second waves of ERP system implementations and web-enabled links between holding companies, their business units and their suppliers. So why aren’t more companies enjoying the benefits promised by the SSC approach? The experience to date suggests that there are a large number of people, process and technology factors which must be carefully addressed if the establishment of SSCs is to be successful.

People and communication The key people and communication challenges include the following: ■

Excellent communication is an imperative; there is a need to involve the local finance and administration staff. During the workshadowing period, there needs to be periodic assessment meetings between the SSC staff and the local staff. Workshadowing is stressful and the need to maintain motivation is a constant challenge.

37

Shared Service Centres

■

It is important to create and build team spirit and to provide support to SSC personnel working away from their home country for extended periods. As such it is important for the local finance management to manage the workshadowing process and to resolve issues.

■

Investments in organizational change management and technology, including re-skilling and training of the finance function, will be required.

■

Implementation of new processes incorporating best practices during the migration period is not always practical. There is an unacceptable risk that major process reengineering concurrent with migration of the activities will undermine the workshadowing. There is not sufficient time to train and educate process partners in the new processes while workshadowing.

■

After the activities are moved to the SSC, there is still a need for support from the key finance and administration manager to ensure the learning process is continued.

Effective SSC processes The key process features of a successful SSC include: ■

a customer focus including support service level agreements and the deterrence of the emergence of shadow personnel;

■

the delivery of sustainable cost savings parallel to the communication of requirements and expectations;

■

performance metrics which align SSC objectives with management actions including cost driver-based metrics and a finance balanced scorecard as well as a continuous improvement programme for all processes;

■

well-trained process team leaders supported by a conducive organizational climate and effective change management;

■

client/customer-orientated process teams which understand the SSC philosophy in a climate of organization learning which encourages continuous improvement;

■

a commitment to quality and customer service and a willingness to embrace a range of compensation and remuneration approaches;

■

a commitment to open and honest communication, evidenced by a willingness for managers at all levels to participate explicitly in change management activities;

■

an explicit benefits realization programme to ensure that the SSC delivers the planned impact supported by a willingness to expand beyond traditional SSC services to new areas outside the finance area.

38

SSC – people, processes and systems

Effective and appropriate technologies Arthur Andersen (1997) argued that up to date technology is required to support the shared services concept and plays a key role in the cross-border consolidation of information and financial systems. Technology has an important enabling role to play in delivering services. The move to a shared services culture will often involve an adjustment or extension of an organization’s information technology (IT) arrangements, the two most helpful applications of which are in ERP and call centre technology. The aim is to combine the various (perhaps incompatible) systems operated by different business units into a common system platform. It may not be possible to switch from multiple systems to a single system overnight, but an initial target of a reduction to no more than five systems should be achievable. Any move to a shared services environment must incorporate a clear understanding of an organization’s IT strategy. The shared services unit must not only be able to interact with other business units’ IT systems, but also needs to be in a position to take advantage of new IT solutions while carrying out its services, which can lead to cost reductions and improved performance. Some organizations will have already implemented ERP throughout their operations, in which case it can be immediately incorporated within the shared services unit. On the other hand, organizations that have yet to embrace ERP should give thought to the dual benefits of establishing an ERP and shared services environment simultaneously. In addition, call centres have become a valuable resource in many organizations, not only for (potential) customers to make contact with a view to purchasing products and/or services, but also for internal use within the organization. Especially when human resource activities are being incorporated into the shared services unit, call centres can be used to support employee benefits and travel, accounts receivable (credit and collection) management, and, in some cases, to support external customers. For handling routine, standard enquiries call centre solutions may be replaced by client ‘self-service’ facilities using browser-based, intranet technologies. Success will typically come from: ■

a strong customer management capability built around effective call centre technology;

■

well deployed ERP systems which reflect the unique requirements of the organization;

■

effective use of intranet and other knowledge management technologies to leverage staff time and experience;

■

an e-business strategy to allow key manual processes to be web-enabled over the short term.

39

Shared Service Centres

THE IMPORTANCE OF INFORMATION TECHNOLOGY One reason SSCs fail to deliver promised benefits is because of IT systems. One good example is a global consumer products company that has grown through mergers and acquisitions to encompass nearly 30 business units. The company implemented SSCs for finance, HR and procurement functions, but has yet to realize the return on investment, operational efficiencies or service quality it envisioned. An assessment of the situation by a third party revealed that many of the company’s operating divisions were not yet linked with the SSCs because each division employed different IT systems to the SSC’s. The organization was not willing to invest in the implementation of replacement systems to meet the standards set by the SSCs, so it was not taking advantage of the resulting economies of scale and process efficiencies. Table 3.1 summarizes some of the tools and technologies described and their benefits. Table 3.1

Technology types and benefits

Type

Benefits

ERP

■

Platform for e-tools

E-workflow management

■

Reduced manual intervention Cost reduction Higher speed of processing Activity independent of location

■ ■ ■

Information data warehouse

■ ■ ■ ■

Enterprise application integration

■

E-procurement

■

■

■ ■

XML and B2B technologies

■ ■

Cost reduction Increased usability Better decision making Desktop distribution Extends the life of existing ISs Facilitates seamless communication across ISs Reduced purchase costs Higher speed of procurement Strategic purchasing Replaces EDI restrictions in the exchange of documents Brings B2B application integration to new levels

Source: Deloitte & Touche

Recent advances in technology have enabled finance support processes to be performed in remote locations with little if any reduction in service levels. Client server technologies, electronic data interchange (EDI), data warehousing, document imaging software and Internet applications are just a few examples of how technology can support a world-class finance and administration function. Information technology considerations play an important part in the implementation strategy.

40

SSC – people, processes and systems

Enterprise resource planning systems The move to an SSC approach offers an ideal opportunity for porting finance applications to the new ERP platforms. Vendors such as SAP, Oracle and JD Edwards were quick to spot a market opportunity and have introduced specific ‘solution maps’ for the FSSC sector. These encompass not just the typical finance processes but can also meet the unique requirements of the FSSC (see Figure 3.1). Fig. 3.1

Typical ERP architecture

ERP data flows Routing Oper. Data

Maintenance

Orders

Machine utilization Plans

Capacity planning

Master production schedule

Released orders

Orders Orders

Customer service/ order entry

Forecasting

RMSs

Quality assurance

Build plan Plans

Shop floor control

Plans

Labour and overhead

Cost accounting Wage rates

Payroll

Employee statistics

Personnel

Explosion

MRP

Actuals Plans Materials

On-order

Allocations Orders

On-hand

Purchasing/ On-order, receipts traffic-In Actual costs

Bill of materials

Inventory/ traffic-out

Actual costs

3-Way match

Checks, memos, invoices

Accounts payable

Shipments Sales

COGS inventory

Journal/ general ledger

Invoicing

Sales

Sales analysis

Invoices

Cash, memos

Accounts receivable

Depreciation

Fixed assets

Trial balance history and budgets

Financial reporting

ERP systems require a significant investment in terms of IT architecture, staff, user licences and so on. While the demand for ERP specialists has fallen off in the wake of year 2000, acquiring and retaining high-quality ERP expertise is still an issue for many SSCs. In particular, attracting project managers and functional area specialists with SSC experience can be very difficult. In addition, ERP implementation consultants, while often necessary, can represent a significant drain on the project’s resources and many lack specific FSSC experience. shared service centres need to carefully assess the resources available and ensure that any investment made in IT up-skilling can be retained within the organization. They also need to ensure that the consultants they retain have an understanding of the unique requirements of the SSC sector and experience of the workings of SSCs.

41

Shared Service Centres

The migration of data and users to the new ERP environment can be a significant challenge. While these customized applications deliver a large amount of the functionality required by the PSO shared service centre, a large number of issues still remain to be addressed. The data models which emerge from the use of structured approaches can alleviate many of the data integration issues which can plague ERP migrations, but the problems associated with system change-over do not disappear entirely. In particular, the detailed migration to the standardized data model and processes incorporated in the ERP solution will often require a significant restructuring of the data and can delay projects. In addition, the SSC may be pulling together data from several different legacy systems. Users may find the move to the new system difficult and it may take several months before staff are comfortable with the look and feel of the new system. Historically, business cases for ERP implementations at shared service centres had as their ultimate goal the integration of the accounting processes of the different functional departments (human resources, finance, procurement, inventory, warehouse management, sales and distribution, etc.), thus rationalizing the information systems used by the organization’s business units prior to the creation of the SSC. These original ERP projects aimed at bringing mainly cost savings and better and more accessible information. The literature on the area suggests that most organizations did not deliver the benefits expected, and that the return from base investment was unsatisfactory. Some mistakes that have been identified regarding the failure to achieve the expected ROI from the ERP implementations are: ■

failure to redesign processes and address business change;

■

failure to focus on benefit delivery;

■

focus on efficiency rather than on achieving competitive advantage;

■

markets growing too fast;

■

weak business cases;

■

year 2000 distortion.

Current research shows that present business cases for ERP implementation are aiming at implementing an ERP platform which will form the backbone infrastructure for a group of new e-oriented technologies (these technologies being: data warehousing, workflow, CRM, knowledge management, extranet, e-procurement, e-expenses, etc). In this new type of ERP project the focus and expected benefits have changed, with many of the new web-enabled or electronic tools having a direct impact in this change of focus. Research by akris.com on the current state of play with respect to ERP and SSCs is shown in Figure 3.2.

42

SSC – people, processes and systems

Fig. 3.2

Types of ERP systems used in SSCs (%)

44 Single instance ERP system that covers same geographical area as SSC 26 Do not have ERP system 16 Multiple instances of ERP systems within the shared services organization 14 Share use of a global single instance ERP system

Source: Andersen/akris.com survey (2001)

Electronic workflow management technology This technology is used at shared service centres as a vehicle for implementing fundamental changes to business processes. Implementations typically cut across a large area of the business enterprise; while this technology carries great promise and some success stories to date, some consider it high risk. Workflow management tools can typically contain details on the routing of tasks throughout a business. Every single SSC business transaction from, for example, ‘verifying an invoice for correctness’ or ‘creating a new vendor in the master data records’ to ‘request credit note from vendor’ can become a task list. In this way the SSC end user of this technology can process a task in an automated fashion by using a business model, the task list and appropriate data for each task. By combining this technology with electronic document imaging, and Internet/ intranet/extranet technology, SSC can achieve important efficiencies. Workflow projects have the potential to become online operational decision-support and process-controlling environments. Key benefits of e-workflow technology are: ■

improved efficiency – automation of many business processes results in the elimination of unnecessary and manual steps;

■

better process control – improved management of business processes achieved through standardizing working methods and the availability of audit trails;

■

improved customer service – consistency in the processes leads to greater predictability in levels of response to customers;

■

flexibility – software control over processes enables their redesign in line with changing business needs;

43

Shared Service Centres

■

business process improvement – focus on business processes leads to their streamlining and simplification.

Reporting tools – data warehousing While technologies to support detailed transaction processing represent the most significant IT investment, the question of reporting tools and data warehousing is also an important issue. Timely and efficient reporting to its clients is critical to the SSC’s success. In this regard the experience to date would indicate that most SSCs adopt a ‘best of breed’ approach to the selection of reporting tools. In many cases SSCs have found that the reporting tools which come as part of the ERP application lack the flexibility and functionality needed. A growing trend among SSCs is to use data warehousing technologies to provide a separate reporting and analysis capability to the centre, as outlined in Figure 3.3. Under this approach the core transaction processing takes place on the ERP platform with reporting and analysis running on a separate read-only data warehousing platform. This allows users to have easy access to detailed transaction data without compromising the integrity of the data or affecting the response time of the transaction processing on the ERP system. In addition, it supports the longer-term possibility of applying data mining techniques to the underlying data in order to identify important trends.

Using data warehousing to meet analysis and reporting requirements

Fig. 3.3

Senior management Two-way communication Data warehouse

Extract, transform and load

BU1 BU2 BU3 Operative applications

44

Source systems (internal and external)

SSC – people, processes and systems

Electronic procurement technology This technology is typically used in multinational environments (including regional or global shared services operations) as a web-based tool to handle the purchase of indirect goods. Through these buy-side Internet applications, the procurement group organizes, expedites and monitors the purchasing process, facilitating communication within the company as well as with the company’s suppliers. The most popular form of e-procurement involves the use of software acquired from a third party vendor. In the classic case the buyer negotiates a contract with each of its suppliers, agreeing to purchase certain indirect goods at discounted prices, then loads digital versions of the suppliers’ product catalogues alongside an e-procurement application such as Ariba Buyer or Commerce One Buysite. Employees use their browsers to search the catalogues, choose what they need and create requisitions. When a manager approves a requisition through a browser, the e-procurement system creates a purchase order, which is streamed directly into a supplier’s inventory application for processing. A third party can also host the e-procurement application for the buyer. Sometimes the application is purchased and operated by an e-marketplace, a website serving as intermediary between multiple buyers and suppliers. Whatever the scenario, the benefits of e-procurement are twofold: ■

it allows automated contract settlement, consolidation of suppliers, optimized prices and increased supplier collaboration together with better information to make more informed purchasing decisions;

■

the end-to-end procurement process becomes much more efficient when requisitions and orders move around electronically instead of on paper, notes or faxes, circumventing the time-consuming processes that drain firms’ corporate assets.

Average organizations using e-procurement have routed about 3 per cent of their spending through the tool; however, as shown in the list below, significant increases in e-procurement spending are expected by organizations that have invested in these technologies. E-procurement solutions offer significant cost reduction benefits to buying organizations by means of: ■

reducing administrative costs by 60 per cent to as much as 95 per cent;

■

curbing maverick purchasing to up to 25 per cent of purchases from 40 per cent of purchases (McKinsey, 1999);

■

transforming the purchasing organization that becomes more strategically focused (Waltner, 1999);

45

Shared Service Centres

■

reducing considerably error and dispute resolutions costs, with up to 30 per cent of manual purchase orders requiring some sort of error-correcting rework;

■

bringing a high return on investment and satisfaction, providing the highest ROI of any enterprise-wide application, paying for itself within a year, and with up to 85 per cent of heavy system users being highly satisfied with the results (Bonisteel, 1999).

According to Forrester Research, the success of this hands-off procurement tool depends on three tightly linked assumptions: ■

procurement applications will help the firm to keep down the number of suppliers and to draw up more favourable contracts;

■

all employees will use the installed e-procurement system, eliminating rogue spending;

■

when all buyers and suppliers are online, the firm’s total spending on goods and services will fall to a natural low.

Direct access to banking In the early 1980s companies recognized that there were economies of scale and improvements in control to be had in the regional consolidation of treasury and banking functions into a separate, formal legal entity. The essence of the shared service centre concept is a greater integration of the treasury function with other key financial functions. Technological advancement has been a key factor in this integration process. Treasury centres previously were characterized by a focus on tax efficiency and worked in a stand-alone environment with little interface to other parts of the company’s financial organization. One example of advances in banking technology is the Bank of America automated accounts payable system. Clients send a single file directly from their accounts payable system containing payment instructions. On the date specified in the file, the bank initiates payment in the format requested – cheque, wire or automated clearing house. It has recently introduced a new payment enhancement that enables a client’s accounts payable system to automatically generate wire payment orders to the Bank of America. The bank provides the client with the EDI file format so that the accounts payable system can build the file of payment orders, including remittance information such as invoice date. In order to protect the data, a security package is used. The system then dials up the bank or uses the Internet to send the file. The bank validates the file and sends the wire payment and remittance information to the appropriate

46

SSC – people, processes and systems

clearing system. A few minutes after receiving the wire request, the bank sends to the company’s accounts payable system an EDI advice acknowledging the order.

XML: the new EDI Electronic data interchange is the established standard for exchanging business documents electronically today. It is limited by rigid definitions for specific documents and lacks the flexibility to accommodate individual company or industry needs. These limitations have led many to propose that XML will become the next generation EDI, taking business-to-business application integration to new levels (Brown and Cronin, 2001). The interactive database Internet language XML promises to remove EDI’s restrictions, enabling ubiquitous sharing of business information in a format that can be easily recognized and processed by business applications. Extensive Mark-up Language is a powerful tool with the potential to replace, extend and improve EDI’s capabilities. However, this view must be tempered by the reality that for business-to-business application integration there are no simple solutions. Initial XML pilots show great promise. However, the real value of the technology must be proven by wide-scale and cross-industry rollout of projects using XML.

THE LIMITS OF IT – ENTERPRISE APPLICATION INTEGRATION It is unlikely that a single ERP platform will meet all the information systems (IS) requirements of the SSC. As a result many shared service centres find themselves running a number of different applications. The question of integrating these to provide effective service to the client organizations is often time consuming and expensive. Immediately following the ‘go-live’ period when resources are stretched to a maximum, SSCs often find themselves relying on manual integration using extract programmes and spreadsheet tools to provide the necessary information. As a result the neat technological architecture which may have been envisaged in the IS strategy for the SSC may take several years to emerge. Careful consideration needs to be given to planning the enterprise application integration (EAI) activities, particularly given their increasing importance in the context of e-business and e-government. Through EAI, a company can align its organization with its technical environment regardless of the technology platform. Enterprise application integration tools enable the truly seamless operation of business processes across a wide variety of legacy systems, ERP systems and specialized applications.

47

Shared Service Centres

There are other compelling reasons for deploying EAI solutions in SSCs, including: ■

efficient information sharing that leads to accelerated time-to-market and improved business intelligence;

■

consistent, integrated and personalized customer service, enabled by up-to-theminute information and seamless service and knowledge;

■

flexible and extensible architecture that allows the freedom to choose best-ofbreed products and helps avoid the need for expensive or inflexible, customerbuilt, point-to-point solutions;

■

zero-latency: real-time access to data that resides in disparate systems, regardless of location;

■

integrated business processes that help reduce operational and inventory costs.

By leveraging EAI technology, companies can unlock all the benefits of an end-to-end value chain. For example, development time for the interfaces between systems can be greatly reduced. Since fewer manual interventions are required to consolidate data from various business units and their disparate systems, EAI tools also reduce the number of costly errors while increasing productivity in the SSC and beyond. Moreover, EAI tools can dramatically reduce IT maintenance costs. Most system upgrades, enhancements and add-ons can be made at the centralized hub rather than at each point of integration, saving significant time and labour. The number of remote IT personnel required to maintain interfaces between systems is also reduced. Plus, companies experience lower frequency and duration of service interruptions due to maintenance activities. Finally, the EAI solution can speed the integration of acquired companies into the SSC environment. By creating a true ‘plug and play’ infrastructure, EAI enables acquisitive companies to maximize operational cost reductions, knowledge sharing and marketing synergies that mergers and acquisitions can provide. Naturally, by taking on the integration challenge, companies face a number of hurdles. Consider, for example, when a telecommunications company integrates and consolidates its customer information into an SSC. In a simplified example, customer information usually resides in at least five different places: ■

a customer relationship management system that contains sales history and customer background information;

■

a billing system, in which resides tariff information related to billing;

■

a service management system that contains the customer’s service history;

■

a network management and provisioning system that provides details about the customer’s physical service on the network;

■

a financial system that maintains payment history and credit information on the customer.

48

SSC – people, processes and systems

None of these systems was designed to hold all of that information. So, currently, when employees create new customer records or update existing records, they probably have to access more than one of the five systems. In order for the EAI solution to be effective in this scenario – to provide a ‘single customer view’ – the integration team must define and construct business rules to specify how the different elements of customer information in different systems will relate to one another. For example, when the same customer record resides in more than one system, a decision must be made about which system will become the ‘master’ and which the ‘slave’. Any changes made to that piece of customer information must be made to the master system, which then drives the change to the slave systems. Making this determination requires the integration team to identify what business processes are being driven by the particular piece of customer information and, based on that, which data source would logically become the master. Who is responsible for the ultimate decision? Typically the project sponsor should be the decision maker. But that person should empower a cross-functional team of all affected parties to provide recommendations on what makes the best business sense. Thus, the integration issue becomes a change management problem, in which one functional area of the business must be persuaded to agree that this piece of information on their system will actually be populated and driven by information from another functional area. Enterprise application integration is not a panacea that can fix every integration issue a company will face when migrating to the SSC environment. In fact, by choosing integration as a solution to broader business issues, companies create a number of additional hurdles that must be overcome. Yet by addressing those hurdles, companies can increase the overall value of their technology assets and they can create business opportunities that did not exist before. For example, in addition to adding functionality, a company can also reduce the maintenance of the overall technology they have in the business by capturing the rules about the different pieces of information relating to the newly integrated systems. More importantly, they can also increase the overall flexibility of the technology environment. This capability should allow them to release new products faster and make business changes in a much more timely fashion than before when they had so many disparate systems, where the processes were not well defined, and where the handoffs between the different systems were not understood.

EMERGING BEST PRACTICE IN SSCs A number of trends have emerged in recent years with regard to FSSCs. In particular 2001–2 saw the emergence of so-called second-wave shared service centres. These technology-enabled centres attempt to leverage web/Internet 49

Shared Service Centres

technologies in order to dramatically improve SSC performance. Stephen Barr in a recent article in CFO Magazine outlined some of the challenges and changes facing the chief financial officer of the 21st century. In the years ahead the finance function is faced with reinventing itself in the face of many challenges. The biggest of these challenges is undoubtedly the challenge of e-business. In a recent report entitled ‘E-Finance’ KPMG consulting suggest that the ‘finance function must break out of its comfort zone and embrace e-business. The web provides finance with the opportunity to get closer to the actual business rather than having people and problems come to the finance department.’ In particular they point out that e-finance will allow the CFO to: ■

eliminate transaction processing;

■

embed financial controls in technology;

■

empower decision makers;

■

explore new opportunities and relationships with stakeholders in order to create value.

The emergence of e-business and the need to continue to attract work to the SSCs has prompted a number of SSC managers to expand their activities beyond the traditional accounting areas.

A growing volume of transaction data arising from e-business applications With the move to e-government combined with the widespread use of the web for procurement and service delivery, SSCs in the public sector will need to address a range of data management issues. In particular, there is likely to be an increased requirement for higher levels of data integrity since part of the e-government process will involve data becoming externalized in the move to open systems. Under the web-enabled SSC, high volumes of detailed data are captured and processed automatically but exceptions may still occur. As a result, the role of the SSC changes from processing transactions and applying internal controls, to one in which the centre deals with processing exceptions while internal controls are embedded in the web applications. From a technology perspective the SSC must meet the challenge of dealing with the diverse technology platforms of the vendors who supply the client organizations. As a result, EAI can be problematic. Research indicates that web-enabled transaction processing reduces costs by up to 20 per cent, yet only 15 per cent of companies use the web for purchasing.

50

SSC – people, processes and systems

A growing move towards self-service finance transactions using the web Using the web functionality provided by ERP vendors, SSCs are offering more and more services directly over the web. These include not just traditional e-commerce applications in the form of business-to-business procurement, but also services to employees and the public – for example, employees can fill in expenses claims with screen prompts highlighting invalid or excessive claims. Private sector organizations such as Cisco have shown the effectiveness of web-based HR processes and this functionality is now becoming standard from many ERP vendors. Controls are becoming embedded in the processes, for example accounts payable and fixed asset management are embedded in the supply chain process or revenue management as part of the customer care process. In addition, intranets allow suppliers to access internal organizational information to improve the co-ordination of the supply chain.

Web-based distribution of information Many SSCs have found that providing an easily navigable intranet is an effective way of distributing large amounts of reports to dispersed users (see Figure 3.4). Using web technologies can significantly reduce the number of telephone calls and e-mails from client organizations. Fig. 3.4

Web-based information delivery

Manual trigger

Netscape

Explorer

Incoming e-mail

Database change Timed event

Server side Java HTML generation

Internet

E-mail generation

Application server

51

Shared Service Centres

In presenting their financial and business data, some SSCs have used formats and tools designed to assist the user in reviewing, analyzing and using the information. For example, SSCs can incorporate formats or features in the web versions of their reports that make them easier to use, such as: ■

linked table of contents;

■

hyperlinks that connect items to other relevant sections of the report and to other relevant documents;

■

multiple file formats (for example, PDF and HTML).

In some web sites, a downloadable data feature allows the user to copy data into the appropriate word processing application or a spreadsheet application. At least one SSC familiar to the authors also provides analytic tools to assist its users in summarizing and analyzing the financial data processed. Other SSCs regularly monitor usage of their intranet/web site to identify ways to improve site efficiency and increase usage. They not only monitor the total number of hits, but also collect data indicating the usefulness of the different types of information included on the web. In addition, those organizations often use recurring information requests, informal feedback and a review of web site traffic to identify data needs that can be better met through electronic distribution. A notable recent development in the area of web-based distribution of information is the emergence of eXtensible Business Reporting Language (XBRL). Sponsored by the American Institute of Certified Public Accountants (AICPA), XBRL is an open specification for the online publication of financial reporting information. It is designed to improve the transparency and usability of all financial data published on the web. While it is initially aimed at meeting the demands of investors and shareholders, it will also have applications internally within organizations since it provides a core XML-based specification for the presentation of financial information over the web. (For a fuller discussion of XBRL see www.XBRL.org.) These second wave web-enabled shared service centres are designed to meet the unique information and transaction processing requirements of the business-tobusiness and business-to-customer e-commerce environment. Under the e-centre concept firms replace existing manual paper-based transaction processing with streamlined e-commerce processes where processing volumes per full-time equivalent staff increase by a factor of ten, thus allowing staff in the FSSC to focus on higher value added analysis and reporting. Under the e-centre concept existing processes such as the purchase to payments cycle are moved to the web, thus eliminating time-consuming manual processes. This move to web-enabled processes is facilitated by an emerging range of enterprise systems from vendors such as Oracle, SAP and Peoplesoft. While these firms were initially slow to respond to the potential of the Internet, they have all recently made significant investments to ensure their core enterprise resource

52

SSC – people, processes and systems

planning systems are web compliant. The move towards the e-centre has also been prompted by the realization among the profession that the techniques and approaches of the 1990s will not serve them well in the web-enabled world of the 21st century, where changing business models and the pressure to create shareholder value requires a change in mindset from the stewardship and control role to the value creation perspective. For the SSC director there is also the changing business architecture with the increased emphasis on managing relationships with suppliers, customers, partners and other stakeholders. Increasingly the organizational value chain encompasses a complex world of online business-to-business markets and specialist industry online exchanges fed by a global supply chain. These industry driven e-enabled supply chains are already visible in the automotive and chemical sectors and are likely to become pervasive by 2005. While these vertical exchanges reduce the complexity of the procurement process, they often add an additional layer of systems complexity as SSCs are faced with integrating their existing ERP system with newer software systems such as Commerce One, Sterling and i2i. In some cases firms may be participating in several different procurement exchanges each with their own preferred system platform. The promise of ERP with single system, single data instance is rapidly been undermined by the business-to-business explosion. Increasingly firms are outsourcing more and more activities and moving non-core support activities to the shared service environment. If the business of the future resembles anything it will look like CISCO, where the key activities are building brands and ideas. This so-called weightless manufacturer has tried to outsource and web-enable as much as possible. Its success in doing this is reflected in its market capitalization. In the virtual world of the web-enabled shared service centre, the core competency will become one of establishing and maintaining relationships based on a reengineered business model. Case study 3.1

Exel: Optimizing through shared services – a successful partnership Exel operates freight services on behalf of other companies, relying on a network of suppliers in 15 European countries. These activities generate more than 1 million invoices a year. With the evolution of e-mail and other digital technologies, Exel realized that it could make use of shared services to centralize and automate its accounts payable processes, thus cutting costs and improving efficiency. In 1999, Exel realized that it had a problem. Fifteen dispersed accounts payable offices were doing the same job. The resulting communication problems and overlap in invoicing tasks led to inefficiencies, delays and unnecessary expenses. Following a radical rethink of its operations, Exel opted to transform its accounts payable operation. Rather than operating dispersed offices, the company consolidated its accounts payable department under one roof by opening a shared service centre in Dublin. In order to further streamline

53

Shared Service Centres

the processing of invoices, Exel incorporated new technology that enabled employees to index and track paper invoices electronically. In addition to increasing the company’s overall efficiency, these moves saved the company £500,000 in one year. For Exel, a pan-European supply chain firm, dispersed accounting offices meant dealing with currencies, mail, phones, different procedures for each department and a whole lot of other administrative headaches, including co-ordinating 15 accounts payable departments scattered across different countries and regions. Needless to say, these headaches cost time and money. But back in 1999, that was just how things were done. Invoices and purchase orders were processed at local offices and few standard procedures were in place to track problem invoices or accounting errors. Shared services and the right technology To consolidate its processes, Exel moved all accounts payable activities to one location, and implemented Tranmit’s Sprinter applications to manage and process the flow of electronic images. Rather than operating from 15 different accounting offices, Exel now routes all its accounts payable through one accounting centre in Dublin. By doing so, the company resolved innumerable problems and inconsistencies that reared their ugly heads when the accounts payable offices were scattered across Europe. Tranmit’s Shane Hussain explains: ‘Before we came into the picture, Exel used to process invoices within the countries themselves. The suppliers would send the invoices to the accounts payable offices in each country.’ The old system: fraught with inefficiencies Exel’s old, distributed way of processing accounts was fraught with inherent inefficiencies. Over and above the mere logistics of communicating between international offices, the old system was subject to endless delays and frustration. Communication between regional offices was slow and expensive. Multiple offices meant multiple discrepancies When Exel delivered goods, employees had to match invoices received in the countries involved with the purchase order before Exel could pay suppliers. Employees often failed to follow order procedures. As a result, invoices frequently lacked information, making it difficult for employees to locate the corresponding purchase order. Exel had no universal process in place for resolving queries or authorizing payments. When accounting inaccuracies occurred, Exel staff had to manually identify, investigate and track discrepancies. Regional offices cost the company time and money in simply communicating with each other in order to resolve invoicing inaccuracies. The move to shared services In 1999, Exel management resolved that the company should become more efficient in processing international invoices. It became apparent that, in order to remain competitive, the company needed to redesign its invoice approval process, automate delays, establish an audit trail – and centralize its accounts payable operations. Exel began looking for a solution that would work with its present procurement system. The technology needed to increase productivity and improve the reliability and control of the company’s cash flow. ‘Exel decided that they would collapse all of these localized accounts payable finance areas and actually set up a shared service centre in Dublin,’ Hussain said. ‘The Tranmit Sprinter system

54

SSC – people, processes and systems

was the appropriate tool to facilitate the invoice approval workflow of the shared service centre in Dublin.’ Compacting 15 offices into one Exel centralized its operations and integrated Tranmit’s Sprinter application with its existing procurement technology. The new technology incorporated all of Exel’s accounts payable procedures, thus ensuring that the process was transparent and auditable. By moving operations to one central shared service centre, Exel streamlined its accounts payable system, and by doing so increased efficiency. By providing fast, accurate accounting and payment, Exel also improved its relationships with its clients and suppliers. ‘Exel wanted to make sure that the service levels they were providing to the customers and the suppliers were indeed significantly better than when the invoice processing was local,’ added Hussain. Now that the Dublin-based European services centre has replaced Exel’s network of accounts payable offices, 40 employees process the company’s European invoices. When invoices arrive at the Dublin centre, they are scanned and indexed into a central system for processing. Within 24 hours of an invoice arriving at the Dublin centre, employees have matched the invoice to its corresponding purchase order. Within another 24 hours, the Dublin employees have distributed unmatched invoices to be investigated. When there is a discrepancy, the centre’s Sprinter application kicks in, and begins following traceable steps such as contacting the supplier and e-mailing the originator of the order in order to find the source of the problem. Because all documents are processed electronically and reside on a central system, Exel can track the path of each transaction. When a problem arises, employees can follow a defined, documented path rather than engaging in a time-consuming paper chase. Streamlining … and saving money By moving dispersed regional offices into a centralized shared services facility, Exel estimates that it has saved £500 000 per year. The company has removed duplicate tasks from its accounts payable process, improved customer service, strengthened its relationships with vendors, and saved money on telecom bills. Additionally, Exel’s more streamlined and centralized accounts payable process means that, although the work is being done by fewer staff, anomalies are decreasing, and all processes can be tracked and audited. In the long term, Exel estimates that by centralizing its accounts payable department the company will cut queries to 10 per cent. Well worth the effort Exel realized that, despite the effort involved, shifting internationally dispersed accounts payable offices to one shared service centre was an essential step in the company’s growth and development. By processing invoices and purchase orders all under one roof, the company has been able to streamline tasks that were previously carried out in duplicate at the company’s regional offices. ‘Setting up a shared service centre is complicated because you have to overcome the issue of local accounts payable areas and to an extent the finance area without losing elements of control,’ Hussain concluded. ‘The key is to make sure that what you have as a

55

Shared Service Centres

part of an overall setting up of a shared service centre is also a mechanism that actually provides visibility of all the transactions.’ Shared services optimized Exel’s accounts payable by: ■

shortening the time between receiving an invoice and paying the supplier;

■

saving £500 000 per year;

■

cutting back on phone, mail and fax expenses;

■

using less office space;

■

improving customer service;

■

saving money on labour;

■

processing invoices faster, with fewer inaccuracies;

■

providing an audit trail of all processes;

■

scanning all invoices and purchase orders and making them available online.

CONCLUSION The decision to move to a financial shared service environment brings in the need for enabling people, processes and IT resources. Benefits from the shared service approach will typically come from three major areas: ■

people-related benefits derived from reduced headcount and operational costs among others;

■

process-related benefits such as economies of scale, reduced process costs and deployment of best practices;

■

technology-related benefits such as reduced operating costs and global technology deployments and as well as better and faster access to information.

Table 3.2 summarizes the main benefits for each area. Table 3.2 People

SSC benefit analysis of three major areas ■ ■ ■ ■ ■

Process

■ ■ ■ ■ ■ ■

56

Reduced headcount and operational costs Improved spans of control Higher customer focus Improved quality of service Improved skills profiles Reduced costs Increased productivity Economies of scale Improved standards and stress on the deployment of best practices Reliable and easily available information BU partnering focus

SSC – people, processes and systems

Technology

■ ■ ■ ■ ■ ■

Organizational-wide technology deployment Platform scalability Reduced operating costs Better available information Faster access to information Common and consistent data models

Source: KPMG report on packaged software

The challenge for the SSC is to create value added through a comparative advantage in information and knowledge-based processes. The shared services organization must become web compliant at all levels and processes and develop a culture of global citizenship where the focus is on managing the complex and changing relationships which make up the value chain. To do this, shared services experts will need to develop their change management expertise as well as their systems integration and communications skills.

References Arthur Andersen (1997) ‘Insights on European Shares Services Operations’ Bonisteel, S. (1999) ‘Electronic Purchasing brings business savings’, Newsbytes news network, 10 November Brown, C. and Cronin, T. (2001) ‘XML: the new EDI’, White Paper, http://www.itpapers.com, February Derfler, F. jr (2000) ‘E-Procurement and B2B marketplace: Smart Business Buying’, PC Magazine, 19 (13), 275, 22 June McKinsey & Company (1999) ‘B-to-B Buying Communities’, Business 2.0, December Waltner, C. (1999) ‘Procurement pays off: companies are finding that procurement software comes with a quick ROI’, Information Week, 26 July

57

4 Location and migration

■

Why location matters

■

Do I have to move?

■

SSC locations – criteria for decision making

■

The global geography of shared services today

■

Conclusion

61 61 62 66

70

59

Location and migration

WHY LOCATION MATTERS The search for the best location for the shared services organization ranges from a simple decision to locate in available space or within current facilities to the international search for the best new ‘greenfield’ site. The key decisions in site selection are whether to locate close to current operations or at a more remote site, whether to have single or multiple sites, and whether to co-locate with clients or to stand alone. In these days of high-speed communication, with combined voice and data networks, the location of a shared service centre might seem almost irrelevant, apart from the need for sufficient quality labour and cost considerations. As Table 4.1 illustrates, organizations believe that there are other factors to be taken into consideration. Table 4.1

Top criteria when selecting a site for the SSC (%)

Labour: availability of skilled people, new skills

74

Communications/infrastructure: telecommunications, transport, etc.

48

Operational presence of the organization/proximity to customers of shared services

36

Proximity to corporate/regional headquarters

25

Office space: availability of office space, etc.

23

Labour costs

20

Source: Andersen/akris.com survey (2001)

An appropriate location is most difficult to decide for organizations that operate on a global level. In many cases, these organizations opt for multiple locations, or ‘hubs’, that serve specific regions (such as Europe, the Middle East, Africa, Asia, South and Central America, and/or North America). This helps when you consider the number of languages (and, until 2002, currencies) in Europe and the different stages of development in African and Asian countries, for example. In all cases, the prime consideration should be the ability to provide the best level of designated services. Following this, it really is a balancing act between the ability to recruit highly skilled management personnel, the extent to which at some future point virtual organizations or even ‘lights-out’ processing may become a reality, and all of the other cost-reduction factors involved.

DO I HAVE TO MOVE? Often moving to a new location is not a choice. Whatever may be the attractiveness of moving to a new, independent location, the threat of losing key people, the cost of training new employees and many other factors can rule out a move. More

61

Shared Service Centres

frequently the corporate will may simply not be there and the temptation to keep the SSC close to the corporate centre, or in an existing location where some unused space has ‘just become available’, can override logical argument for relocation to a site that is neutral and visibly free from undesirable biases. For a purely domestic organization, with business units in several locations, it is often sensible to choose either an existing or new location central to all of the business units, or to benchmark the existing business unit which carries out the shared services unit’s activities most effectively and establish it there. If transaction processing is the foremost consideration, the location should provide access to welleducated employees at reasonable cost and tax levels, as well as room for expansion. Moving to an independent location immediately endows the shared service centre with the image of an entirely new business unit within an organization, rather than one that has been cobbled together from parts of the existing business units. A fresh start, so to speak. Having said this, it may be helpful to be physically close to the organization’s other business units, since proximity helps the unit identify with clients and in turn, clients may be reassured by having services ‘close-at-hand’. Whatever your objective, setting up a shared services unit in a new location could become one of the most important decisions you make as you strive for excellence in shared services. There are several reasons why organizations choose a new or different location: ■

to abandon the mindset and culture of the old organization;

■

to build a new service-oriented culture with new people;

■

to leave behind redundant labour;

■

to access lower-cost labour;

■

to access special skills, such as foreign languages and IT;

■

to benefit from more flexible employment conditions;

■

to move closer to the epicentre of the client base;

■

to access lower-cost accommodation;

■

to access higher-quality infrastructure, such as telecommunications;

■

to benefit from more favourable fiscal arrangements.

SSC LOCATIONS – CRITERIA FOR DECISION MAKING The criteria for selecting a location are consistent across most organizations that are looking for a place to put their shared service centre. Moran, Stahl & Boyer is a consulting firm based in Atlanta, Georgia that specializes in site selection.

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Location and migration

They have defined a list of considerations, illustrated in Table 4.2, which range from labour availability and costs to local community support and image. Table 4.2

Criteria for site selection

Labour availability

Business taxes

Labour cost

Power reliability

Facility costs

Communications

Access to company facilities

Infrastructure

Labour quality

Incentives

Quality of life

Community image

Air access

Community support for business

Source: Quinn et al. (2000)

There are one-time costs of setting up a new location as well as ongoing cost and non-cost considerations. The one-time costs of setting up a new centre location as those related to employee relocation and the separation costs for those leaving the organization. There are also one-time costs for moving office furniture, fixtures and equipment, and for moving and setting up technology hardware. Recurring costs for consideration are employee salaries and benefits, ongoing facilities costs, rent, operations and maintenance. Non-cost issues are those related to how far people have to travel on a daily basis to come to work and the quality of life that employees can have in the new community. These recurring and longer-term cost and non-cost considerations will have the greatest impact on the sustained success and performance of the shared services organization.

Key site selection criteria Research on shared services in Europe identified a more comprehensive list of factors which firms typically need to take into account. The key site selection criteria identified in the literature include the following.

Cost/benefit ■

What is the assessment of the site’s equipment network and support capabilities and current utilization – current equipment capacity, network capability and utilization, hardware/platform configurations and staff to maintain new capacity?

■

What is the assessment of the site’s wage scales and incentives, establishment of common job descriptions and job levels, local government and company allowances and make up of fringe benefit rate?

63

Shared Service Centres

■

What is the assessment of the site’s tax and duty requirements – specific site tax and duty advantages and disadvantages, tax holiday and incentive schemes, general permanent residency status and taxation, i.e. to sign cheques? If work is being done for another country will this allow taxation?

■

What is the assessment of the site in total start-up costs – initial expenses for people, technology and equipment, government grants and assistance, and if work is moved to another country, relocation or training grants for new employees?

■

What is the assessment of the site with regard to the total closing costs if a shared service centre is not established – restructuring and investments that have been made locally and disadvantages if presence is not established?

■

What is the assessment of the site’s overall working local environment for a shared service centre – the political climate, stability or otherwise, regulatory and compliance issues on general company data and/or personal data, the ability to exchange data within and outside the country, and time zones among clients?

Tax/treasury/legal ■

What is the assessment of the site on government regulation or information in/out of countries, regulations regarding data processing, paper invoicing, record retention and edifact rules, exchange control in/out of the country, requirements on location of the company’s books, confidentiality rules (i.e. can one country review the books processed for another country) and intercompany invoicing practices and processes?

■

What is the assessment of the site on specific cultural issues, cultural norms, practices which will impact business, language, historical and political practice, and norms?

■

What is the assessment of the site regarding infrastructures to support the centre, roads, telecommunications and utilities?

Client/business support ■

What is the assessment of the site regarding current and future client and business support by finance, the role of total finance (the non-shared service centre work at the local business unit), quantitative factors, e.g. knowledge of client business, ability to accommodate unique business practices, ability to assimilate common practices/programmes, awareness of who and where clients are, and the knowledge of the needs of clients?

Human resources ■

What is the assessment of the site’s total population and skills levels, shared service centres staff, non-shared service centre staff remaining at the local

64

Location and migration

business unit, continuance of client support by job rotation, language (can English and the local language be supported), and international accounting knowledge within the multi-entity, multicurrency environment? ■

What is the assessment of the site on government barriers/assistance when relocating workers, workers’ councils and unions, and limitations of human resource movement across legal entities?

Other considerations Table 4.3

SSC location criteria based on a review of the literature

Cost benefits

■ ■ ■ ■ ■

Local environment

■ ■ ■ ■ ■

Tax/treasury/legal

■ ■

■

Human Resource

■ ■ ■

Wage scales and incentives, local government and company allowances, fringe benefits Tax and duty requirements, tax holidays and incentive schemes, requirements for taxation status Government grants and assistance Relocation or training grants for new employees Closure costs of existing sites, etc. Political climate, stability or otherwise Regulatory and compliance issues on general company data and/or personal data The ability to exchange data within and outside the country, time zones among clients Roads, infrastructure, telecommunications, utilities Specific cultural issues, cultural norms and practices, language Access to banking system Government regulation on information in/out of countries, consider regulations regarding data processing, paper invoicing, record retention and edifact rules Exchange control in/out of the country, requirements on location of the company’s books, confidentiality rules Total skill pool and skills levels Language skills International accounting knowledge within the multi-entity, multicurrency environment

In identifying and selecting an appropriate location, many firms will engage consultants to offer advice on the different potential sites. While this is a useful starting point, there is no substitute for ‘gut feeling’ and two or three extensive and well-planned visits by the CFO, project leader and others to the short-listed sites. In applying these types of criteria to sites, firms will often try to rank locations on the basis of a cumulative score across the various factors (see Figure 4.1).

65

Shared Service Centres

Fig. 4.1

Example of a comparison of different locations

Taxation and incentives Accessibility/infrastructure Attractiveness for international staff Labour flexibility Language skills Local staff availability General business environment

Overall weighted quality score

6.2

6.7

6.8 6.2

6.1

6.1 5.0

5.0

5.2

5.2

5.1

5.3

5.3

5.0

5.4

5.4 4.9

5.4

5.2 4.5

bo

el

M

Br isb

an

e ur ne Pe rth Sy dn ey Be Gu ijin an g gz h Sh ou an g Ba ha ng i al o Ch re en n Hy de ai ra ba d M um b Ne ai w De lh i Ku al Pun a e Lu m p Au ur ck la nd Ce bu M an Si i ng la ap or e Ta ip ei Ho B Ch ang k iM o in k h Ci ty

5.1

THE GLOBAL GEOGRAPHY OF SHARED SERVICES TODAY While shared services took root across the USA as early as the 1980s, the concept of pan-European shared services has proved to be the Holy Grail for many companies. Historically expensive in terms of labour costs, the Netherlands and Belgium, especially Flanders, stand out as popular locations in Europe for new shared services units. Geographically in reach of most major western European markets and with a history of being outward focused due to relatively small internal markets, they have a high percentage of multilingual inhabitants and a flexibility and work ethic that results in high levels of productivity. The Netherlands, which according to Vanderwicken’s Financial Digest claims to have attracted 400 US companies to establish centralized administrative operations between 1999 and 2002, emphasizes its multilingual labour pools, modern infrastructures and sometimes tax breaks too. Shared service centres are now likely to move to locations further from Dublin as the labour pool begins to come under strain and special skills such as foreign languages become more difficult to find. As Table 4.4 illustrates, many firms are now looking to more far-flung locations which come with their pros and cons. The global trend remains regional centres in North America, Europe or Asia Pacific but there is a growing interest in Latin America. However, for many firms some countries will still need to be mostly served by national centres.

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Location and migration

Table 4.4

Some emerging offshore options

India Pros ■ ■ ■ ■ ■

12-hour time difference from USA East coast ideal for round-theclock work Huge labour pool Excellent education system English-speaking

Cons ■ ■

Distance from USA limits ease of site visits/training Some problems with physical infrastructure, particularly power

Philippines Pros ■ ■ ■

‘American’-speaking Excellent education system Stable workforce

Cons ■ ■

Some political instability Some physical infrastructure shortcomings

Russia Pros ■ ■ ■

Overbuilt, redundant infrastructure Inexpensive labour pool High number of PhDs and engineering degrees

Cons ■ ■ ■

Labour pool has little or no business training High rate of business fraud Asset risk

Ireland Pros ■ ■ ■ ■ ■ ■

EU member Business-friendly government Corporate tax rate of 12.5% to be phased in by 2003 High rate of multilingualism Excellent education system English-speaking

Cons ■ ■ ■

Victim of its own popularity, with rising labour and overhead costs Intense competition for skilled labour Relatively small labour pool

Source: PricewaterhouseCoopers

North America In North America the traditional locations for shared services have included San Francisco, Salt Lake City, Phoenix, Denver and Raleigh. In recent years, however, locations such as Albuquerque, Dallas, San Antonio, Tampa and Kansas City have begun to emerge as locations (see Figure 4.2).

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Shared Service Centres

Fig. 4.2

North American SSC locations Traditional locations Current popular locations Emerging locations

Salt Lake City Denver

San Francisco

Kansas City Raleigh

Phoenix Albuquerque San Antonio

Tampa Dallas

Source: PricewaterhouseCoopers

Europe, the Middle East and Africa In EMEA, Dublin and Amsterdam have long been popular with firms such as Philips, Microsoft, Oracle and so on. In recent years, however, Lisbon, Madrid and Budapest have emerged as locations of choice, and in the future firms envisage exploring locations such as Krakow in Poland (see Figure 4.3). Fig. 4.3

EMEA SSC locations

Traditional locations Current popular locations Emerging locations

Tallinn Glasgow Manchester Dublin London

Riga Danzig

Vilnius Amsterdam Poznan Warsaw Maastrich Krakow Prague Budapest

Lisbon Barcelona Madrid

Source: PricewaterhouseCoopers

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Location and migration

India In India, Delhi, Mumbai and Bangalore have been the traditional locations for Global Fortune 500 firms to set up SSCs. However, recent arrivals in India are looking further afield to cities such as Pune, Hyderabad and Chennai.

South America South America is a relatively new and emerging player in the SSC location game. The size of the collective consumer market, however, makes it almost certain that cities such as San José, S~ao Paulo and Santiago will continue to attract regional shared services activity. Already firms such as Carrefour are exploring their South American options as past of their move to a global network of shared services.

Asia Pacific rim While the Asia Pacific rim has long been a preferred location for low-cost manufacturing, it is only in recent years that firms have looked to the region as a potential location for shared services. As Figure 4.4 illustrates, the geography of Asia makes places such as Manila, Brisbane, Perth, Auckland, Bangkok, Hong Kong and Kuala Lumpur suitable locations. Fig. 4.4

Asia Pacific rim SSC locations

Hong Kong Manila

Bangkok Kuala Lumpur Singapore

Traditional locations Current popular locations Emerging locations Brisbane

Perth

Sydney Melbourne

Auckland

Source: PricewaterhouseCoopers

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CONCLUSION One of the significant findings from a recent akris.com survey is the growing proportion of shared services that are operated in Asia Pacific (11 per cent), South America (6 per cent) and eastern Europe (5 per cent), rather than the region of origin of the parent company. This is likely to be a reflection of the more favourable wage rates and lower operating costs in those countries. It also shows that organizations are finding ways of overcoming the geographical, cultural, linguistic, political and economic obstacles to the implementation of SSCs in these regions. In coming years, we expect American-based companies to make increasing use of Central and South America, European companies to utilize Hungary, Poland and the Czech Republic, and global companies with several hundred people in their back office to establish SSCs in low-cost countries such as India. Indeed, we are now seeing some large organizations setting up a four-tiered approach to support services: ■

local: some services – for example the business partnering side of finance and various field sales force processes – are best left at the local business unit site;

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national: activities such as payroll, which differ greatly from one country to another, are typically hosted more efficiently and effectively at a national level – a payroll function is not necessary at every site but one might well be needed in every country;

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regional: it may be best to consolidate at a regional level those activities that can be taken out of the country but still require language skills and time zone proximity, for example billings and receivables;

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global: this may constitute an SSC located in India for processes that do not demand proximity to the local business unit or strong language skills, such as intercompany or supplier payments.

In the future location choice will require a contingency-based approach which matches the unique needs of firms with the relative comparative advantage of different locations.

References Quinn, B., Cooke, R. and Kris, A. (2000) PricewaterhouseCoopers presentation.

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5 Business process outsourcing

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Introduction

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Why outsource internal services?

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Tips for the outsourcing decision

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Managing the outsourcing relationship

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Conclusion

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INTRODUCTION With the growing trend toward focusing on core business capabilities, many companies are outsourcing selected business functions to expert partners who can perform them more efficiently and cost effectively. A step beyond IT outsourcing, business process outsourcing includes such functions as cash collection, claims processing, invoicing, payroll and customer support. Outsourcing administrative functions is a realistic option at any time in the process of establishing shared services. Some organizations may see outsourcing as the only option as they do not possess the skills or resources to create effective shared services in-house, or they wish to avoid the inevitable disruption implementation can cause. In the context of existing shared services, outsourcing can be viewed as the ‘third’ phase. Having decided to create internal shared services (phase 1) and followed through by implementing best practices (phase 2), some shared services operators realize that they will never be able to reach the standards of world-class operations in certain of their activities. Outsourcing parts of shared services operations becomes a viable alternative (phase 3). The decision to outsource administrative and support activities is being taken by forward-thinking managers who question how work has traditionally been carried out and whether there is a better way of doing it. The availability of a new breed of third party suppliers and complementary IT makes outsourcing an increasingly attractive option for some. Many companies now outsource non-core and/or non-strategic activities – such as finance, human resources, legal and administrative processes – to third parties. These operate their businesses along shared services lines to provide services economically to several client organizations through sharing people and resources and by implementing common processes and systems.

WHY OUTSOURCE INTERNAL SERVICES? The conclusion many managers reach when they realize they need to trim overheads and eliminate inefficient internal service units is to outsource. They see moving the problem out of the organization as the most prudent and easiest course of action to end interdepartmental disputes, poor service and ‘unreasonable’ costs. Implementation can be complex and always impacts people and strategy. But in many cases, it may be the wisest alternative. Table 5.1 gives examples of SSC activities which might be outsourced. There are a number of specific reasons why firms may choose to outsource some or all of their shared services activities. These include: ■

cost reduction;

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poor internal performance;

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capabilities needed for some activities not core to strategy;

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a better, cheaper, more effective alternative;

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insufficient expertise available to upgrade;

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potential loss of control not an issue;

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service no longer relevant;

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previous experience with successful outsourcing;

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too disruptive to make the changes internally.

Table 5.1

Examples of SSC activities which might be outsourced

Administration 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Administrative information systems Copy centre management and copy production Consulting and training Data capture Desktop publishing Mailroom Printing and reprographics Records management Secretarial and clerical General

Human resources 1. 2. 3. 4. 5. 6. 7. 8.

Human resources information systems Benefits Consulting and training Placement and outplacement Recruitment and staffing Relocation Workers’ compensation Forms processing

Finance 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

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Financial information systems Consulting and training Financial reporting and analysis General accounting Internal audit Investment accounting and analysis Payroll processing Purchasing Taxes Transaction processing Treasury General

Business process outsourcing

Table 5.1

continued

Sales and marketing 1. CRM information systems 2. Advertising 3. Consulting and training 4. Direct mail 5. Field sales 6. Market research and strategy 7. General Real estate and facilities management 1. Construction management 2. Copy room management 3. Engineering 4. Facilities maintenance 5. Facilities management – general 6. Facilities operations 7. Food and cafeteria 8. Mail handling 9. Process administration 10. Real estate and plant information systems 11. Reception 12. Reservations 13. Security 14. Stockroom and supplies

The outsourcing issue should be part of a larger one regarding how the function or functions being evaluated for outsourcing fit into the organization. As part of the outsourcing evaluation, questions like the following should be answered: ■

What are the organization’s core competencies?

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Which services or corporate support functions are not integral to or close to the core competencies?

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What are the barriers raised by the corporate culture?

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What is the cross-functional impact?

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Can the organization fix itself internally before considering outsourcing?

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What might be better accomplished by an outside vendor?

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What are the goals the organization wants to achieve from outsourcing?

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What kind of relationship with a vendor is most appropriate?

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How does the organization deal with the people issues? Case study 5.1

Algar and PricewaterhouseCoopers BPO in Brazil Algar, one of the leading companies in Brazil, is outsourcing a number of its back office functions to the Business Process Outsourcing (BPO) division of PricewaterhouseCoopers in a seven-year deal. This is the first comprehensive business process outsourcing agreement to be signed in the Brazilian market. The long-term contracting of these business processes to PricewaterhouseCoopers BPO will enable Algar management to focus on their core business. The result will be increased efficiency, reduced costs and a flexible and responsive back office, all contributing to improved shareholder value for Algar. As one of the earliest examples of a comprehensive back office outsourcing deal, this pioneering transaction will deliver substantial benefits for Algar. Under the terms of the contract, PwC BPO will take responsibility for finance and accounting, human resources administration, procurement and legal support services, as well as the IT required to provide these services. Currently all these functions are operated from 18 different business unit locations. In the future, these services will be delivered out of a purpose-built centre of excellence to be located in Uberlandia, Brazil. Approximately 250 people were transferred to the employment of PricewaterhouseCoopers during the second half of 2001.

TIPS FOR THE OUTSOURCING DECISION Some shared services units may find it impossible to compete with external suppliers, or may be unwilling to invest in the resources, technology and expertise to carry out certain services internally. If you have done the best you can to improve the performance of your internal service unit and have concluded that the potential benefits from outsourcing are greater than the downside risks, the following eight tips should help you develop a case and get the best from outsourcing: ■

competitive advantages and the business environment: develop a clear understanding of the strategy of the business the unit serves. Consider potential changes that may alter competitive forces and require a change in strategy. Consider the implications of outsourcing on the achievement of a business strategy, including cost, quality, flexibility and timeliness. Question capacity utilization of in-house services if demand is variable.

■

Cost: recognize the scale of cost and potential savings. Ensure a clear definition of services to be outsourced, and their value, including such aspects as ‘free’

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advice and flexibility. Include all costs – alternative revenue from redeploying staff and releasing facilities and social costs of termination. Use appropriate activity-based cost measures. Avoid developing cost penalties for activities that remain through increasing cost allocations or loss of economies of scale. ■

use a methodical approach: the process of deciding whether outsourcing is warranted involves numerous steps or phases. These are: identifying requirements; preparing and distributing a request for proposal (RFP); examining proposals; evaluating vendors; negotiating contracts; and implementing outsourcing. Adopt a methodology that describes the various steps to be performed and lays out the project plan necessary for a thorough evaluation. Just as applications development activities should be guided by a written, explicit methodology, the effort to consider and possibly implement outsourcing should be systematically conducted and documented.

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core activities: protect and retain core capabilities and those where integration with other activities is vital. Outsource to enable the organization to focus on core capabilities. Don’t release proprietary information on key technologies or customers, which may fuel the competition.

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assess suppliers: identify the number of viable suppliers. Ensure there is effective future competition between them. Consider switching suppliers if necessary. Avoid the creation of a monopoly supplier.

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develop supply relationships: select by evaluating supplier capability, culture and fit. Explicitly state and agree expectations on service levels and future developments. Ensure key individuals and groups understand the rationale and support the relationship. Specify and communicate expected performance from each partner and how it will be measured and compensated. Consider how disputes will be settled. Aim for a simple contract, with scope to develop the relationship. Monitor performance frequently and avoid managing the supplier’s assets or accepting responsibility for their output. Restrain use of power and aim to develop trust and commitment.

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technology: use in-house technology sparingly and anticipate changes that may require different technologies. Question the use of old technologies that may not meet future needs. Scan potential suppliers of new technologies. Outsource when the internal unit does not have the capability to keep up with changes.

■

revising the sourcing decision: be ready to review, revise and develop sourcing arrangements and make sure your contract permits changes. Review the potential cost of change in the context of changing business needs. Ensure you maintain the ability to understand changing technologies and whether your partner is keeping up. Do this yourself if you can, or through a third party.

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Case study 5.2

National Australia Bank National Australia Bank has awarded a landmark global real estate outsourcing contract to the Business Process Outsourcing (BPO) group at PricewaterhouseCoopers, the world’s largest professional services organization, to manage its diverse 3.5 million square-metre portfolio. The agreement expands PricewaterhouseCoopers’ existing contract with the National for corporate real estate services in Australia, which was awarded in 1998, to include bank properties in the UK and the Republic of Ireland. The umbrella agreement, with an initial three-year term, is believed to be the first private sector, multicountry real estate outsourcing contract. It is also the second major global real estate process outsourcing contract to be announced by PricewaterhouseCoopers’ BPO group, which currently manages the Australian Government’s $2.5 billion property portfolio spanning 60 countries. In the UK, for example, PwC will mirror the service delivery standards already established for the National in Australia, so that a common global performance framework can be established. The National has a significant property portfolio, comprising some 2500 leased and owned properties and sites, including 400 revenue tenants. The diverse portfolio throughout Australia, New Zealand, the UK and the Republic of Ireland includes commercial office and retail space, data centres, automatic teller machine sites, and some industrial and residential components.

MANAGING THE OUTSOURCING RELATIONSHIP In its work with clients in the area of process sourcing, PA Consulting have found that major corporations around the world are not obtaining the benefits from outsourcing that they had expected. This global disappointment is usually the result of two fundamental errors: first, the initial approach to outsourcing is tactical rather than strategic; second, the management of the contract is adversarial rather than co-operative. How can corporations realize the benefits they initially expected from outsourcing? In PA’s recent research, they examined the most successful outsourcers and concluded that they manage their relationships better. They invest in building the relationship right from the very start. The most successful outsourcers have strong relationships with their suppliers, hold high level strategic reviews, and have an effective process for continual improvement that is underpinned by performance measures and end user satisfaction measures. When organizations follow these steps, they achieve higher levels of benefit and greater cost savings than those who follow a more traditional approach. Based on this work PA have identified four key factors that are the hallmarks of successful relationship management:

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■

create a shared vision for the outsourcing and reflect this vision in the contractual arrangements;

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include effective performance measures that motivate the contractor to ensure that its actions serve the client’s business objectives;

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establish clear communication mechanisms;

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develop a clear contingency plan and exit strategy.

Create a shared vision A shared vision is the first step to managing an outsourcing relationship. In the early days, cost or head-count reduction were the most common reasons to outsource. In today’s world the drivers are often more strategic, and focus on carrying out core value adding activities in-house. These strategic objectives mean that outsourcing initiatives must come from the top. Executive management must articulate the goals and objectives of the outsourcing initiative and communicate how the process will benefit the organization. The goals of the outsourcing initiative have profound implications for the selection of the partner and the future management of the relationship. The vision permeates every stage of the process, from the earliest establishment of goals through the writing and monitoring of the contract. In a shared vision, both partners contribute. A specialized provider can help define realistic requirements and added benefits. Major investment in getting to know and understand each other is essential. This is often started through preliminary discussions on an informal basis to learn about each other, and to obtain views on the scope of the contract. (Interestingly, the growing complexity of the services required has meant that in many cases nobody in the market has the necessary mix of expertise or geographical coverage, and this has resulted in a move towards suppliers working together to form consortia and joint ventures to provide the required services.) Contractual failures may arise when requirements are specified too tightly, leaving little scope for innovation, or even more importantly little opportunity for the supplier to be able to respond to business needs as they inevitably evolve. The added complexity of outsourced services requires greater flexibility than before, often with a genuine risk/reward sharing mechanism that motivates optimal performance.

Include effective performance measures Performance measures are an effective tool for motivating performance. Requirements should be specified in terms of outcomes rather than inputs and a service standard attached against which to measure performance. Though it is difficult to set performance standards, they are an extremely effective way to

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ensure high quality service, particularly when incentives and penalties are attached for over- or under-performance. Performance standards must be realistic if they are to be effective. In our experience, there is a tendency to overspecify requirements: are turnround times for payables of 48 hours required if the approach process takes seven days? In addition, the standards need to evolve over time, and normally become progressively tighter.

Establish clear communication mechanisms The approach to communication between the partners will reflect the spirit of the outsourcing contract and the complexity of the services being delivered. Simple, wellspecified services, such as cleaning, catering or fleet management, will require day-today operational contacts and formal performance reporting and invoicing. However, as the services increase in complexity, more active communication is essential. In particular, this may include joint planning of service delivery and problem resolution, discussion of proposed innovations or changes in approach, consultation on staffing changes and so on. This will be supplemented by regular monthly reporting showing performance against standards, pricing and problems encountered. Senior management must stay involved during the implementation of the contract. Not only should there be a clearly defined escalation procedure, but senior management should meet at appropriate intervals to discuss how the relationship is working. Meetings should be held at the operational level to address the workings of the outsourcing contract in practice, to identify and resolve any problems that have been encountered, and to agree on changes to ensure continued satisfaction.

Develop a clear contingency plan and exit strategy Despite robust communication mechanisms, the relationship between two parties can break down, and a well-defined contingency plan is essential to address separation or divorce. Where essential services are provided externally, continuity must be guaranteed at all times. Imagine a bank that is unable to process cheques, a major manufacturer that is unable to transport goods, an airport that is unable to unload baggage or a public service organization that is unable to process enquiries. These are clearly unacceptable scenarios, and while the objective of a contingency plan is not for it to be used, it is clear that it must be in place before any contract is awarded. The main components of any contingency plan centre on people. The expertise that is required to deliver the services rests with the people who deliver the service, and it is particularly important to be able to pull back the key group of staff that manage day-to-day operations. Great care is needed in this area both to address any labour law issues and, more importantly, to ensure that staff are motivated.

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The most successful outsourcers have more mechanisms in place after outsourcing. In today’s world of increasingly complex outsourcing, success will depend on investing in and managing the relationship. As Heather Smith of PA Consulting says, ‘this process requires vigilance and hard work, but we have seen over and over that the rewards to the committed outsourcer are well worth the effort.’

CONCLUSION Business process outsourcing will undoubtedly remain a permanent fixture of the corporate shared services landscape in the future. The cost savings are too compelling to ignore for both the private and public sector. Driven by economic realities and technological development, BPO is increasingly becoming more than a co-operative notion. Capturing synergies is not just about brainstorming how we might work well together. Those who engage in BPO in the future must do so in ways that are much sharper and more intelligent. Business process outsourcing already has real sticking power today and it will continue to work best when companies are poised for explosive growth as an intelligent alternative to growing overheads in a misguided effort to meet demand. While BPO is definitely a permanent fixture, its form is changing rapidly. The akris.com surveys revealed that the scope of BPO will expand radically to encompass new processes such a e-HR, order to cash and facilities management. The driving force behind the decision to outsource is the ability to focus on core competencies. But what is the true value proposition outsourcing brings to an organization? Plain and simple – outsourcing allows organizations to be more efficient, more effective, and to reduce costs. Outsourcing enables organizations to improve operational effectiveness and gives them access to top-level professionals in non-core areas, state of the art technology and industry defined best practices.

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6 Change, leadership and stakeholder management

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Introduction

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The nature of change in SSC environments

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Stages involved in migrating to the SSC model

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Lessons learned from SSC implementations

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Realizing benefits from the SSC implementation

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SSC management

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What to expect from the leader of shared services

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Coping with culture and distance

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Conclusion

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INTRODUCTION The business case for investment in shared services is clear. The benefits that can be derived from better integration, better quality data and the standardization of business processes can be significant. But there is evidence to suggest that many companies investing in shared services have not achieved the benefits that the business case indicates are available. There are many reasons for this, but there is no doubt that poor SSC leadership and the absence of a coherent change management programme are often to blame. The management of SSC implementations in organizations is intrinsically bound up with change. The SSC literature has many examples of change projects that have gone wrong, some disastrously so. Effective change management lies at the heart of successful SSC implementation. However, effective change management is not easy and demands a substantial organizational commitment and top management support. It means helping the organization get information on its current position. It means helping it make sense of what success means for it and putting this into a new framework. It means creating a structure to manage the transition between the decentralized existing approach and the new SSC and setting up that structure in a way that maximizes its chance of success. Skilful steering of the process is required, including knowing how to manage resistance to change in an appropriate way. In this chapter we grapple with these issues and the management of change arising from SSC implementation.

THE NATURE OF CHANGE IN SSC ENVIRONMENTS The experience of ‘first wave’ SSC implementations now shows that the failure of organizations to capitalize fully on the benefits of SSCs was often due to weaknesses not in the SSC concept but in its execution. In particular, change management was often viewed in unsuccessful implementations as a discretionary cost and therefore dispensable as cost pressure increased. The reality is that this was a false economy. Poor change management often results in longer programmes, higher implementation costs and extended periods of stabilization after go-live, as the ‘people’ issues ignored during the implementation emerge later. As a result, there is a growing acknowledgement of the need to address change management issues as an integral part of programmes to implement shared services and, in particular, the need to manage change effectively. In its broadest sense, change management refers to all the non-technological activities that are required during and after the SSC implementation to achieve the desired business benefits. They include: stakeholder management; communications; education and training; benefits management (particularly of the ‘intangible’, nonquantifiable benefits); culture and organizational change; and resource management.

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The list below provides some examples of change management risks and issues that have been observed in previous implementations, and serves to illustrate the range of possible pitfalls: ■

a lack of consistent understanding of the objectives of the business change programme that could undermine ‘buy in’ and active support;

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a failure to fully support and commit to the programme by the most senior managers;

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a difference in the levels of commitment between the SCC-based managers and those in other countries;

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a possible change in corporate direction that could reduce senior management support or weaken day-to-day programme management activities;

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perceived weakness in project management skills in some functions.

It is now recognized that most SSCs experience a ‘dip’ in performance immediately after ‘go-live’. Change management processes during and after roll-out and cutover have a key role to play in minimizing this ‘dip’, by: ■

engendering a smooth ‘go-live’;

■

minimizing the effect on normal business operations;

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achieving rapid stabilization after ‘go-live’.

There are a series of key components to the change management process: ■

readiness assessments: these should be used to understand the programme ‘terrain’ before embarking on any change management work. Other initiatives, the history of change and the change skills already present in the organization will influence the capacity of the business to implement SSC-related change.

■

impact of change assessments: these will identify exactly what will be different as a result of the SSC implementation. Focusing on the big changes and on those business communities with the most change to manage will help direct resources to where they are most needed.

■

change planning: this will bring together the readiness and impact assessments for each affected community and determine the appropriate package of interventions needed to get the business ready for the system. Interventions for each affected business community vary from some training and development for those experiencing little impact to extensive business participation and involvement for those fundamentally affected. There is a need for particular focus on those who are key to the success of the programme. The change management plan would normally consist of a package of interventions including education, communication, training, business operating procedures, definition of roles and responsibilities, skills assessments and detailed transition planning for individuals.

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The whole transition will be much easier to manage if the business case and the impact of change are clearly communicated at the outset. ■

Business implementation: Ensuring effective business participation in certain stages of the implementation will make a significant difference to the quality and acceptability of the system and new processes. This will complement the change management activity described above. In particular cutover should be planned in detail to ensure there is no discontinuity in business operations. Problems arising from poor cutover often take a long time to rectify and divert the business from the more important task of getting back to stable operations. When there has been inadequate participation from the business, the quality of the solution is often poor. It is usually too theoretical and doesn’t work in practice, causing people to work ‘around’ the system rather than with it. In order to get people to take ownership of the solution it is important to get the right people from the business involved from the start. If they have an input to the design, they will be more supportive post ‘go-live’ thus reducing the dip in productivity. If they are not involved, there may be a prolonged period of reduced productivity with detrimental effects on the business.

STAGES INVOLVED IN MIGRATING TO THE SSC MODEL One of the key issues which firms must make regarding the move to the SSC is how fast or slow to proceed towards the full centralized structure. The evidence to date suggests that the speed of transition is very much contingent on the organization in question. In particular, factors such as the number of sites involved, the level of integration of the existing IT platforms and the climate for change must all be taken into account when deciding the pace of change. What is clear, however, is that the likelihood of a successful transition to the SSC model is substantially improved when a structured transition/migration plan is put in place before the project begins. Typically firms will take the following steps when moving to the SSC structure.

Phase I Establishing the business case The focus in the initial stages is on raising awareness of the SSC concept and on securing executive sponsorship and buy-in at CFO and board level. This will typically involve briefings to executives on the SSC concept and information gathering. Attendance at seminars/conferences, short sessions with consultants and discussions with firms that have made the move to an SSC are often helpful at this stage. The primary objective at this point is to achieve a shared understanding on the following issues:

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the nature of SSCs

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the limitations of the SSC

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likely timescales, benefits, drawbacks and critical success factors.

It is vitally important at this stage that expectations are carefully managed to avoid loss of executive support later on in the project. Once the firm has a clear understanding of the issues involved it can begin to assess the business case in detail. This will typically involve a cost benefit analysis under the main headings of People, Process, Technology and facilities. The question of likely locations and issues such as greenfield versus brownfield versus existing locations will begin to be addressed. Useful cost and other comparative data is often available from groups such as consultants, government bodies, recruitment specialists and educational institutions (particularly with respect to graduate/staff availability). All of the large consulting firms now have service offerings in this area and this can help short-circuit what is often a time-consuming data gathering process. Some managers that the author has interviewed, however, feel that the data gathering process was an essential part of building up a model of the decision process and were uncomfortable about relying on consultants. As part of the initial assessment, firms will often examine the degree of standardization in the existing processes to determine the opportunities for process consolidation or reengineering. This is a useful exercise even if the ultimate decision is not to proceed to the SSC.

Phase II Designing and configuring the SSC model Once the business case has been established and the final choice of location made, the detailed operating structure and configuration of the SSC needs to be addressed. This will involve deciding what activities of services to perform in the SSC. The choice of services moved to the SSC will have implications for staffing, structure and process design. Discussions with experienced staff as well as with managers from successful SSCs can help in configuring an effective centre. There is some evidence to suggest that reengineering of processes should be postponed until after the setting up of the new SSC as it is difficult to introduce new processes at local sites and then migrate the relatively new process to the SSC. Service level agreements and cost recovery/pricing are important issues to be addressed at this stage. In most cases, however, service quality is achieved through developing a customer-focused approach rather than through strict application of SLAs. In the initial set-up the SSC will require significant co-operation from local and corporate IT staff and this needs to be planned for well in advance. Additional configuration decisions usually involve choices about structures (number of levels) and processes (by country or by accounting service).

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Phase III Rollout and implementation The rollout of the SSC involves the project team working closely with local controllers over several months. Good communication is essential and many firms will use a workshop approach to enlist the support of local controllers and HR managers in workshadowing and migration. The purpose of the workshops is to explain to country heads the likely impact on their organizations and to enlist their support for change. This exercise has two crucial goals: ■

to enlist local support – the co-operation of the national human resource staff is needed in order to identify which local staff would have a job in the future and which staff need to be persuaded to stay at least for the transition period;

■

to manage expectations – rather than selling the project as something that will revolutionize the finance function overnight, the team should simply point out that after migration of the relevant activities to the shared service centre the service provided would at least match that which the local country organization was used to and there would be no disruption to the business.

One of the key factors in the whole process is workshadowing of the activities which are to be carried out eventually in the shared service centre. The main objectives of this is to understand and learn the local accounting and reporting practices. This involves understanding the local chart of accounts, US GAAP accounts, periodic external reporting, month end processes, reconciliation processes and liaison with the local organization. In countries such as France and Germany, a company may have extensive operations, which necessitate stays of up to five months to ensure that the firm does not lose essential local expertise. Any SSC staff involved in extended periods of workshadowing away from home need to be supported and should not feel isolated. As tasks are migrated to the shared service centre there is the inevitable loss of jobs in the local organization. Some staff members may be able to move to another business unit. However, for the majority this is not an option as they may not have the required skill set and the costs of retraining may be higher than the cost savings generated by the move to a shared services strategy. Many of these local staff are sources of critical knowledge and this knowledge is lost to the organization for ever.

Phase IV Extending and expanding Once the SSC is up and running, the challenge is to create value added and ensure a continuous improvement in the key metrics of process quality, costs and time. In this regard benchmarking or performance metrics can be useful. It is always

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worthwhile revisiting the original business case to see if the SSC is meeting expectations. In particular, fine-tuning of processes and systems can lead to significant savings in the post-implementation period. It is critical in the postimplementation period that firms avoid an extended dis-improvement in the process performance. In common with IT systems implementation, SSC implementations often give rise to a decrease in the quality of the process for a period after the migration. While it appears almost impossible to avoid this problem, steps should be made to minimize the duration of the decline in process quality and local controllers should be alerted well in advance to the potential hiccup. As the SSC becomes an established part of the organization’s support activities it should: ■

focus on finance as a value added activity instead of a cost centre;

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adapt a continuous improvement strategy;

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recognize that SSCs are a business within a business and in the future will get external pressure from other sites that may offer to do the accounting for the organization at a cheaper price than the organization’s internal SSC can do it;

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be flexible in terms of how the SSC and its business is defined – in the future, due to economies of scale there may be a need to take on activities for other organizations.

Other approaches The literature on shared services contains many examples of the different stages involved in the transition to shared services. As an example, Figure 6.1 shows the approach recommended by Partners for Change. While different approaches will have their adherents, it is important for firms to be comfortable with the approach adopted and firms need to avoid blindly adopting the approach recommended by outside advisers.

LESSONS LEARNED FROM SSC IMPLEMENTATIONS Partners for Change consultants, who have helped a number of firms implement SSCs, have highlighted some key lessons for those considering implementing shared services. They point out that the move to an SSC represents a highly symbolic change of status for the management of national companies in a multinational organization. These managers of what were major corporations are having to adapt to no longer owning the full value chain and are effectively being asked to run a local selling service. If they see the move to an SSC as the first stone

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to be removed from their foundations, they will resist the process from the start. In order to avoid this, Partners for Change suggest the following.

Develop a clear strategy and a clear business case By developing a strategic view of shared services benefits realization you will ensure that the focus of your programme is on delivering results and getting a longterm return on investment. The individual projects which make up the SSC implementation should be approved and scheduled into the programme on the basis of sound business cases. The risk in most SSC projects is that the business case and the mandate both sit at HQ and are of little comfort or inspiration to those working locally who are directly affected. The business case must work at a number of levels and those involved have to feel that they have some control over their own destiny and that the remaining jobs will be of a higher quality and greater value to the organization. There is no real ‘win’ for those who are likely to lose their jobs and they must be given the necessary counselling and outplacement support. Their reactions to the plans have to be managed and directed so that they are not angry with those coming in to take their jobs, thus hindering the exchange of knowledge. It is essential to allow enough time to manage the human impact and to get engagement locally as far as possible. Fig. 6.1

The Partners for Change approach to the shared services project life cycle

Strategy

Design

Support the process through high level business case, process benchmarking, review or structural options ■ ■ ■ ■

Implementation

■ ■

Operation

■ ■ ■

Enhancement

■ ■

Determine business model Define structures Design new processes Design new technology

■ ■ ■

Design new organization Recruitment approach Design organizational principles for shared service centre

Build shared service centre Implement new processes on existing or new systems platforms

■ ■

Move from project to operations Business case becomes budget Quick wins Service scope changes Service ownership changes

Recruit new staff Manage loss of existing staff

■ ■

■ ■

Performance measurement Organization development

Service system platform changes Service relationship changes

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Virtual shared service centres

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Business cases should encompass: ■

scope

■

benefits

■

costs

■

business impact and barriers

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implementation outline.

The major issues in developing the business case tend to be in the definition of benefits and assessment of business impact. The definition of costs often misses out the internal implementation costs associated with the participation of the business in the project. It also often omits the buy-in process which is a critical step in preparing the ground for successful implementation. Benefits are difficult to define. The business needs to focus not only on the benefits that are tangible and measurable, but also on those that are hard to measure and intangible. Gaining clarity about the full range of potential benefits and attaching value to them will help demonstrate the full value of the investment to the business.

Manage sponsors and internal stakeholders effectively What makes or breaks an SSC strategy is not the systems themselves, but the support and buy-in at a local level. This is where endorsement by the CEO is vital. If they do not position the SSC as part of a move to a European or regional business and deal with resistance at the outset, then it will fail. The business as a whole must see the SSC as congruent with its approach to the market and key to its future survival. One way to overcome resistance is to marry shared services to employee bonuses, i.e. to link compensation plans to common strategic objectives. Before setting up an SSC, business managers need to take a long hard look at the culture of the company and to ensure that staff appreciate the importance of corporate goals. It will then be much easier to get employees to pull together and buy into any planned restructuring. At the outset of the project there is a need to map the stakeholder territory, i.e. to ascertain who will be affected and to what extent. If the whole company is affected then it has to be the CEO who sponsors the project. Changes in individual functions will need to be sponsored in turn by the functional heads. Other key stakeholders need to be identified and managed throughout the project. The best way to engage them is to give them clear accountability for project delivery and meaningful roles in the project. The sponsor and key stakeholders need to understand what influence they have, how to exert it and how to get involved. In reality, the sponsors and key stakeholders will have many priorities. They will buy into the project at the

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outset, but then get distracted, which will result in inconsistent messages being given out. Employees will get the impression they can drop the project as it is not a priority. Sponsorship skills need to be developed and sustained and support needs to be provided to help people fulfil these difficult and often underestimated roles. It is also important to establish benefit delivery mechanisms and to make sure that all stakeholders are committed to delivering the agreed benefits. SSC managers do not always have the skills and experience to drive projects. They need support, training and development in order to play an effective role.

Allocate accountability It is essential to decide early on whom to make accountable for the achievement of the SSC objectives. This decision will be informed by the definition of key stakeholders and who has been identified as having influence over impacted communities. At the end of the project these people will be held accountable for achieving their department’s objectives so they will need to be the people who will actually get staff to do things differently and who are in a position to make the tough decisions that will lead to improved performance. Accountability needs to be made explicit, for example by putting measurable targets into performance appraisal objectives, by offering an incentive such as a bonus for achievement of targets and by building them into budgets. Having made people accountable, it is important to get them involved in the project in a meaningful way so that they can influence it.

Plan and manage for the ‘dip’ As the project approaches ‘go-live’, it is necessary to create more specific measures to help manage the inevitable performance dip that occurs immediately after ‘go-live’. In the longer term, sustaining mechanisms are needed in order to establish a period of continuous improvement. These need to be embedded into the fabric of the business allowing it to be monitored regularly. Eventually these will be adopted as a key component of the management information provided to managers and incorporated into annual performance appraisals.

Use consultants judiciously and develop in-house capability One option is to use an implementation partner for your SSC implementation requirements. They will take some of the risk and often provide a turnkey SSC solution. This is an expensive option and one that leaves the organization dependent on the partner for further development work. When using an outside consultant

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they provide most of the skills you lack, but also acquire a substantial amount of knowledge about your organization. When they go you are left with very little capacity to repeat the process for yourselves, which means that when you approach the next project you have to buy in those skills and that knowledge again. On the other hand, you could build your own in-house capability. This requires considerably more management and may lead to the company being left with surplus skills after the first implementation. This solution is more cost effective, but it is often hard to find the appropriate skills. A third, very cost-effective solution is to leverage your own in-house resources by bringing in external consultants to work alongside internal staff. In this way there can be skills and knowledge transfer and the company can use the implementation as a means of building its own internal competence centre. The key is to structure the project in such a way that internal staff take responsibility, learn the skills and diminish reliance on the external partner.

New staff will need to be recruited Only a small proportion of the existing staff are likely to relocate regionally or internationally for what is often clerical work. There is therefore a need to design the new organization, to recruit new staff and to decide what to do with those who are left. In Europe this requires close co-operation with works councils or unions who may have to be consulted on appropriate management decisions and will require those changes which affect employees to be co-ordinated for minimum impact. In many European countries there is a requirement to create a social plan for any major reorganization. This identifies those who will be most affected by the changes and helps prioritize those who are to remain employed according to their social need, redeploying staff where possible. Close co-operation between management and the works council will ensure that the needs of the business and the employees are satisfied. This is an area where expert advice is essential.

Break the news early and clearly It is essential to communicate plans openly and early in consultation with the works council and unions. Uncertainty breeds concern and quickly affects morale, productivity, customer service and ultimately share value. There is a need to make clear who will be affected, to give them the right information and to start planning. Changes impacting the same group of staff need to be co-ordinated and planned on an integrated basis. It is important to face the managers as early on in the process as possible and take on board their concerns so that they can be handled. This is why there is a tendency to design an SSC strategy by process but to implement it by country.

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Communicate, communicate and communicate again The fundamental objectives of communications management during the SSC implementation are to: ■

ensure that sufficient information is available to allow effective decision making;

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maximize commitment to the programme from stakeholders and involve them as required;

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provide inspiration within the programme;

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inform stakeholders on progress.

It follows that the risks of poor communication include the following: ■

managers are unprepared to deal with internal and external discussions, or the unexpected;

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work is duplicated or omitted;

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interdependencies within the programme or with other business initiatives are not identified, resulting in waste and delay;

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programme leaders are unaware of risks or issues.

It is not possible to set up shared services overnight A typical SSC project can take from 12 months to three years depending on whether new ERP systems have to be built. Each project will go through a number of stages and the programme should be stepped giving the organization time to stabilize after each major change. The design phase can be time consuming but is essential to the success of the project. It is unlikely that a process can simply be imposed on each country without consultation. It is usually necessary for someone to spend time with local managers finding out how things happen now in order to be confident that the SSC model is going to work.

Specialist knowledge can help Much of the upheaval and pain involved in the move to an SSC can undoubtedly be avoided by drawing on the experience of someone who has been through the process before. They can help you navigate through the various challenges and manage the large number of detailed actions on various fronts. The complexity of a shared services project is in the number of people, processes and functions affected and the need to enlist the support of all stakeholders. There are a number of areas, particularly around the major change levers, where a specialist can provide valuable support:

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■

programme management: this includes not just the project office activities but the preparation of an overall route map to get to the end point of an SSC. It would also involve management of the business case, i.e. periodically revisiting the original strategy to ensure that the SSC is meeting agreed objectives.

■

systems: enabling the business to accept new systems and looking at the implications for the organization. One or more consultants may also be needed to provide the systems build capability.

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facilities management: to help you decide on the location of the SSC and then to equip and support it as a new business entity, for example managing the installation of telecoms solutions.

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organization: agreeing organizational models, job profile design, recruitment requirements, etc.

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ongoing organizational development: recruiting and managing a team of experts to the SSC whose core function is to provide the service rather than supporting the main business.

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process redesign: extracting, capturing and transferring existing knowledge to new staff; producing the design required for a change of location (which could involve simply transferring existing processes or a major process redesign).

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people: relocation, retraining or outplacement of existing staff; redesign of jobs; recruitment, induction and training of new staff; knowledge transfer from existing to new staff.

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legal and fiscal: obtaining the approval of the relevant authorities for new organizational structures, i.e. audit, tax, legal.

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enabling technology: selecting and managing the installation of the appropriate technology, for example, scanning, printing, workflow, e-commerce.

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change management: communicating with all stakeholders who may be affected by the move to the SSC, i.e. staff, customers, suppliers. This may also involve training and development.

REALIZING BENEFITS FROM THE SSC IMPLEMENTATION Historically, organizations that have invested in SSCs have been motivated by either operational or efficiency reasons. SSC benefits realization needs to be done in a careful and systematic way. Benefits identified should be measurable and quantifiable so that organizations have a basis for prioritization. Opportunities for benefit need to be filtered to determine where the best value can be obtained. Business cases need to be articulated for every benefit opportunity, identifying

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whether they are strategic or tactical, quantifiable or intangible, and should include the logical timescale for implementation. The success of any SSC programme will be measured by its ability to deliver significant business benefit to the organization. A benefits management process is needed to keep all those in the programme focused on delivering the identified business benefits. Benefits that are not tracked are less likely to be realized. It is often a key role of the SSC leadership to introduce a ‘good practice’ approach to benefits management for individual projects. Organizations need to adopt a structured approach and ask some basic questions: ■

What was the initial business case and did we deliver the expected benefit?

■

Would the potential of shared services have been applicable to our business case?

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How can we leverage the SSC infrastructure we have established to deliver more benefits?

A range of opportunities will emerge from the answers to these questions that will tend to fall into three main categories: ■

quick wins: these are benefits that are readily available from the current SSC system, but are not yet realized. Normally these benefits can be achieved relatively easily with minimal effort. Their value is partly in allowing the organization to start to recoup some of the programme cost fairly soon after the start. Perhaps more important, however, is that the gains should help to build credibility in the programme and perhaps bolster the case for continued investment.

■

medium-term wins: these are benefits that are available from changes to current SSC configurations, but are not yet realized. They are different from quick wins in that they would require investment in time and resources, with benefits being delivered through small or medium-sized projects.

■

new benefits: these are the benefits that would add value to the organization, but are available only through additional investment in more functionality and/or complementary software packages to provide capability in CRM, e-commerce, HR or data warehousing, for example. Larger or more complex projects may be necessary to deliver these additional benefits.

SSC MANAGEMENT Leading shared services is essentially about people and how they perceive and experience their respective roles in the shared services enterprise. Shared services operations, like businesses, rely on good planning control and execution. More

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importantly, the business plan for shared services needs to be owned and driven by those who run the shared services operation. If shared services really is like any other business, those who lead and implement shared services must have clarity of purpose and process, as well as a genuine understanding of the client’s needs. Shared services has moved on from the functional, administrative model we all know. Today’s shared services operation delivers services that are high quality, cost effective and timely.

It’s not about accounting skills it’s about attitude You don’t need to be a financial expert or a tax wizard to be a good SSC leader. Indeed some of the most effective shared service leaders do not have a background in finance. But you do need drive, intelligence and flexibility. You need to be a savvy communicator who can relate to people and a consummate politician who can deal with ambiguity. Most of all, you need to understand what it takes to operate a successful business. You need to be fundamentally driven by the need to deliver a service and do something that people value to the extent that they are willing to pay you for it. That is the essence of being a shared services leader. Having knowledge and experience in a particular field is the least important requirement. It’s attitude and leadership skills that make the difference between success and failure. Being able to bring together the right people is crucial. The people you select need, first and foremost, the right attitude and an inherent talent for shared services work. Second, they need to be able to co-operate with others. Having knowledge and experience in a particular field is the least important requirement. In short, hire for attitude and train for skills. Skills you can teach – attitudes and character are inherent. James Lawrence became CFO of General Mills in 1998. His challenge was to transform the 83-year-old US $7 billion cereal giant into a well-oiled machine. General Mills was plagued by a hierarchical and inefficient finance department. Employees were dispersed across the company’s various departments – and administrators spent more of their time gathering data than finding out what it all meant. During the summer of 1999, Lawrence put together a task force charged with improving the performance of General Mills’ finance department. Members of the task force spoke with unit managers, examined the results of a recent internal survey, and opted to move the finance department into a shared service centre. The task channelled General Mills’ dispersed finance department into three divisions. They then moved the company’s 65 transaction processing division employees from isolated departments into one new unit. Employees at the shared

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services unit set their own hours, are self-directed and work in close conjunction with the company’s various business units. Two years after moving its finance department to a shared service centre, the General Mills finance team spends less than a quarter of its time gathering data. Professional staff turnover has dropped drastically. In recognition of his efforts, Lawrence earned the 2001 Excellence Award for Finance Leadership, Development and Training.

Straight talking always helps Shared services leaders need to remember that rewards and incentives are essential for retaining staff, reducing turnover and running a successful shared services operation. There is more than one way to compensate and motivate an employee, whatever HR orthodoxy says. As Andrew Kris says, ‘Treat employees as people, not balance sheet items. No mother ever gave birth to a resource. I am nobody’s resource and neither are you!’ We are all people and most of us appreciate open communication, honesty and clarity. Talk to your people – frequently. Tell them what you know – openly. Speak about change – honestly. And remember that there is nothing you can hide from your people that they haven’t figured out for themselves already. These are the basic tenets of good communication that all successful shared services leaders understand and act upon. Don’t forget to prepare for planned departures – including your own. You are an employee too and it’s easy to overlook the possibility that your boss may show you the door within the next fortnight, although they might do it nicely and give you a nice package. Don’t be deceived by the golden handcuffs. They’re probably made of copper rather than gold. There are many organizations that refuse to consider ways of offering financial incentives in order to retain people as a matter of principle. Most golden handcuffs are attached mainly to the advantage of the employer and not the employed. Richard Brown came into the CEO position at EDS with a clear mandate: to break out of the old way of doing things. In January 1999, EDS was not thriving. Brown determined that the real problems with EDS involved the company’s outmoded, cumbersome structure. EDS operated 48 self-sufficient units that neither communicated, nor co-operated. It turned out that the units were duplicating one another’s efforts instead of working together. Brown put together a working group and devised a new business model that compressed the 48 units into four departments, cutting duplication and introducing a shared services model. By July 2001, EDS had increased quarterly profits by 17 per cent and raised revenue by 7.5 per cent.

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It’s about working smarter Moving to a shared services model can, if properly deployed, accomplish three key objectives: it can streamline operations, thus cutting costs by optimizing administrative tasks; it can, through automation, minimize manual activities, leading to more precision and better documentation; and shared services can ensure better communications and co-ordination between corporate departments. By initiating the move and overseeing the implementation of shared services, an executive officer becomes the hub of communication between management and administration. By providing his or her vision throughout the shift to shared services, the corporate leader can maintain the alignment between corporate objectives, implementation and results. Former Western Union CFO Kim Patmore launched a quiet revolution following the merger of payment services firms First Data and Western Union. In 1996, she was given the task of merging finance and accounting staff from both companies into a First Data shared service centre. Moving into her role as CFO of First Data, Patmore set about motivating employees to focus on process improvement, partnerships and other initiatives. She achieved her objective through a mentoring programme that matched experienced, senior employees with their junior counterparts, encouraging them to impart knowledge, and in the process, improve productivity. The result? Over and above the usual benefits of operating a shared service centre, Patmore’s mentoring programme reduced training costs, improved productivity, drastically shrunk claims for overtime pay and reduced turnover rates from 12 to 8 per cent. As a result of her innovation, Patmore earned the 2000 CFO Excellence Award for Training/Building a Finance Team.

As usual, people make the difference Most companies with or planning shared service centres have access to the same resources to achieve those goals, e.g. technology is readily available to all, facilities can be purchased or built, organization structures can be designed and implemented, SLAs can be negotiated and approved. However, the most significant resource that can make the difference between an acceptable result and a ‘hit’ is the quality of individual members of the centre. Recruiting and retaining the best players is not an accident. Companies such as Kraft Foods (San Antonio, TX, USA) and Georgia Pacific (Jacksonville, FL, USA) have expended a significant amount of effort in the development of an employee profile for their centres. The immediate result of this effort was 16 auditions for every position filled, and the longer-term result has been a workforce that understands their individual and team role in the centre, their clients’ needs and the impact of the centre on the business.

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The objective of these centres is to hire team members that understand and exhibit team behaviour, i.e. the well-being of the team is equal to or greater than their personal well-being. Even with perfect recruiting, this behaviour must be reinforced with an environment that defines expected outcomes, measures and compensates on those expectations, and encourages the ownership of the factors that affect the realization of those outcomes. This environment nurtures commitment by team members to the company, centre, process and each other. It provides a stage for players to display passion and excitement about their work, rather than just going through the motions.

WHAT TO EXPECT FROM THE LEADER OF SHARED SERVICES Ideal candidates for the role of shared services leader need to be decisive and to be willing and competent to make difficult decisions. The ability to think strategically and create a service-oriented culture for the unit is essential. The best shared services leaders stand out as strong communicators, able to manage through influence and to create and motivate teams that are firmly focused on results that matter to clients. At heart, they are strong leaders with substantial general management skills. Selecting a shared services unit leader from outside a company enables someone with experience to be brought in. However, the person will need time to understand the business and gain the confidence of the team. The alternative is to select someone from within the organization. This person will probably not have experience of the shared services environment and may be seen as partisan in approach. Someone with the experience and confidence of having already led one or more shared services units is likely to rapidly gain the confidence of a new team. In addition, the shared services unit will benefit from a fresh, external perspective and will be more likely to rapidly overcome obstacles based on culture and history that are an inevitable feature of the early stages of implementation. Whether recruiting internally or externally, the selection criteria and leadership profile should be very clear. The following guidelines help to define what a shared services leader should be capable of doing: ■

defining what the unit stands for, for example, ‘the most efficient provider of transactional services’.

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stating the shared service unit’s purpose, for example, ‘ensure clients get best practice accounting services at costs competitive with alternatives that enable their businesses to grow efficiently at lower cost’.

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being clear about what to do and how to do it, for example ‘identify best practices in HR, work with clients to identify their customers’ needs, assist them

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in drawing up people practices, and provide a range of services to support implementation and develop key people’. ■

understanding the client’s needs. This will be a primary source of competitive advantage. Understand the business; get to know personalities, politics and how the organization actually gets things done.

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segmenting the client base into groups with similar needs that can be met economically. Not all clients need or value the same services. Providing those precise services that people value to the extent they are prepared to pay for them – not more not less – is the key.

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being precise about what the unit offers. Define products and practices using terms that clients use and make them easy to understand.

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marketing services as effectively as clients market their products. Segment the client-base into groups with like needs or behaviours. Appoint a person to act as product manager and prepare a marketing plan. Make promotion part of every service provider’s job.

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pricing competitively compared to third parties. Remember, services are only worth as much as an external supplier would charge for work of equivalent quality and timeliness. Offer the same services outside the company, if policies allow, confirming the value of services and generating an additional source of revenue.

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measuring and invoicing activities. Calculate the value of every service and tell clients. If clients can’t see what services are worth, as best the service will be undervalued, and at worst it will be deemed worthless.

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stressing that service is people – never compromise on quality. Don’t tolerate poor performers, hire the best and make sure everyone earns their keep. Ensure time is set aside for maintaining competence and for keeping up with new developments in each discipline.

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organizing to encourage appropriate behaviours and define success. Encourage everyone to think of the service as their own business. Create a set of interdependencies between individuals that cause them to work together and rely on each other. Define success in terms of clients repeatedly coming back for more, or when billable activity targets are met.

■

rewarding appropriate behaviour and success. Develop compensation and variable pay schemes that are consistent with how success is defined.

These guidelines and the expectations of the shared services leader should form the basis of an internal or external search. The guidelines will assist in briefing the consultant responsible for an executive search assignment, if such a course of action is chosen. Table 6.1 outlines a sample job specification for a shared services leader. This description applies generally to running any shared services operation. It is not

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specifically aimed at running a financial transactional centre or a professional and advisory centre. There are specific leadership skills that are different, however, for leading these two different types of shared services organizations and this is one of the reasons why we advocate the separation of transactional processing from professional and advisory services. Whether you are evaluating shared services or outsourcing as an option, the people issue remains central. Outsourcing rubbish means you only get slightly better rubbish back – very expensively. Table 6.1

Sample job specification for an SCC director

The position The Director of Shared Services Europe is expected to provide leadership for the continuing smooth operation of the unit and to manage its continuing development. As the Director is unlikely to possess the functional expertise required for every service, leadership skills and a profound understanding of what it takes to manage a serviceoriented administrative organization are the keys to success. The ability to establish a close working relationship with client units and with functional heads is essential to understand client needs and to put effective resources in place to meet them. Experience of operating in a large, complex, US-based corporate environment is important. The function of Director, Shared Services has three major dimensions: strategy and organizational development; active, hands-on involvement leading a shared services organization; and development of future service offerings. The main tasks of the Director of Shared Services will be: ■

To define and gain approval for the shared services strategy in Europe, its budgets and its implementation.

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To lead and motivate an effective service organization.

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To rapidly establish personal credibility as the unit’s leader.

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To take an active, hands-on role in key relationships with key business leaders.

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To ensure the unit continues to provide effective, efficient services.

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To seek and ensure implementation of improvements in service delivery.

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To expand the range of services, to grow the business.

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To manage the operating budget from X million to X plus million.

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To lead the specification and implementation of IT systems that support business units and the centre’s activities.

The ideal candidate The ideal candidate is someone with a thorough understanding of corporate strategy, business needs and the European economic and political environment, as well as exceptional people management skills which will drive these activities. The Director needs the ability to persuade business leaders that opportunities to reduce cost and raise effectiveness can be realized through sharing services with other business units and sites and through standardization and implementing common systems.

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Table 6.1

continued

The ideal candidate has the maturity to work effectively in a multifunctional environment and the ability to handle ambiguity. The following personal characteristics are considered to be essential: Leadership

Open, flexible, and with a down-to-earth manner that gains the respect of colleagues and delivers on service.

Interpersonal

A team player whose energy and communication skills make this person a persuasive negotiator and relationship builder.

Handles complexity

Able to handle ambiguity that arises in a service environment in a complex, diverse and geographically widespread organization.

Thinker/Doer

A clear thinker, able to translate knowledge and understanding of the business, economic and political environment into actionable strategies and willing to make decisions independently in pursuit of the strategy.

COPING WITH CULTURE AND DISTANCE Differences of opinion will arise, for example between the SSC team and the operating sites in the different locations. Some of the factors to be considered are: ■

consensual versus authoritarian management styles: these vary widely between individuals. However, there are also patterns of acceptable behaviour that are embedded in countries’ cultures. For example, a directive, authoritarian style of management is likely to be far more acceptable to most American employees than to Japanese ones.

■

risk taking or risk-averse behaviour: managers in some countries are more likely to make decisions without reference to higher authority, and to accept the consequences of those decisions. In Japan, consensus is the aim.

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social proprieties: in some countries and cultures it is easy to inadvertently give offence to the host. For example, in some cultures it is considered abrupt to raise the business purpose at the first meeting; welcomes and social exchanges only are expected. The consequence, clearly, is that the pace of conducting business can be much slower.

■

when ‘yes’ means ‘no’ or ‘perhaps not’: it is not acceptable in some cultures to be put in the position of admitting a failure – failure to understand; to have authority to make a decision; to be able to carry forward an action.

There are also some guiding principles for effective team behaviour that extend beyond cultural or physical boundaries. These include mutual respect for team members’ cultures and working practices, and a focus on solutions rather than

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problems and no recriminations (‘finger pointing’) when things go wrong. While a detailed discussion of these issues is beyond the scope of this section, it is clear that SSC implementation requires a wider understanding of change management and cultural issues than many practitioners have demonstrated to date.

CONCLUSION To date many SSC implementations have been treated as finance projects and not business-driven transformations. Approaching the implementation from a purely finance perspective often leads to attempts to try to tie down all of the major requirements at an early stage with large disincentives for changing these at a later stage. As a result, many firms have found themselves trapped in a process/ technological straitjacket solution that ignores the dynamic, evolutionary nature of SSC implementations and the business environment. An SCC needs to be implemented in a business-driven, cost-effective fashion where the focus is on driving out real long-term benefits in pursuit of shareholder value. If long-term value from an SSC is to be achieved, it requires the ongoing commitment of senior executives to the project. The failure of senior project sponsors to remain involved in a project will result in the project team losing sight of the business nature of the implementation and allow it to become a finance project. Project sponsors/champions must not only provide the resources for the implementation but must also take an active role in leading change. In particular, they must create the emotional climate for change and be proactive in building co-operation among the diverse groups on the implementation team and throughout the organization, often across national boundaries.

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7 What’s this thing called culture?

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Introduction

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Culture and the SSC

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Areas where culture affects the SSC

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Culture shock and intercultural adaptation

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Conclusion

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What’s this thing called culture?

INTRODUCTION The increasingly internationalized nature of the SSC environment has led to a growing recognition of the importance of cultural issues. The SSC setting is unique in that, unlike traditional multinational settings where we perhaps have to deal with the clash of just two cultures (the firm’s home culture and the host country culture), in the SSC we can be dealing with up to 20 different multilingual and multicultural teams/actors. Unfortunately for finance professionals the largely monocultural nature of their professional training leaves many of them poorly equipped to meet the challenges of operating across diverse cultural contexts. The anecdotal evidence to date would suggest that the response of some shared services directors to the overwhelming complexities of managing cross-cultural teams is to drive out the differences by trying to institutionalize their familiar monocultural work practices and routines across the shared service centre. Under this narrow view the organizational and national culture of the multinational corporation (MNC) trumps all other cultures and people are expected to leave their ethnic or national cultural identities on the pavement before entering the building each morning. The stereotypical image of a plethora of socially challenged accountants may seem extreme but the reality is that the professional accounting formation leaves many of them poorly equipped for the multicultural MNC environment. In their case, the professional accounting training places a premium on quantitative and analytical skills and little or no attention is given to the softer skills of communication and change management. The heavy bias in the profession towards the province of reason, abstraction and objectivity and the suspicion of the emotional forces them to import a set of values, beliefs, cultural norms and cultural practices. Research by the author suggests that misunderstood national cultural differences may be the most important cause of many of the workplace tensions found in SSCs. In addition, discussions with the country teams reveal a growing need for SSC management to urgently address the issue of culture. In particular SSC management needs to: ■

possess a cosmopolitan mindset which is capable of operating comfortably in a multicultural environment;

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be culturally sensitive and understand the cultural integration challenges of the SSC setting;

Chapter 7 was written by Sophie Cacciaguidi.

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■

be able to adjust to the norms of new cultures as countries are migrated to the SSC;

■

understand the importance of intercultural communication issues in the SSC as a source of difficulties.

In the more enlightened SSCs, the response to cultural differences has been to engage in cultural sensitization through culture specific training seminars. In addition, firms will often employ consultants and firms offering customized international organization services which centre primarily on hand-holding in the areas of relocation, repatriation and retention of ‘foreign’ staff as well as more exclusive executive programmes aimed at ‘cultivating an international perspective and positive attitude to culture’.

CULTURE AND THE SSC To some, culture is a combination of norms, values, feelings, thinking, roles, rules, behaviour, beliefs, attitudes, expectations, meanings and so on. To others, culture is a way of life of a people, i.e. their interpersonal relations and their behaviours as well as their attitudes. Some managers would like to believe that their SSC is ‘culture free’ and as such they argue that competitive forces in the form of markets, industrialization and new technology override differences in national context. However, our research suggests that SSCs are very much culture bound and are heavily influenced by their location and cultural setting. In the SSC setting staff may be affected by a number of different types of culture as outlined in Figure 7.1. It is clear that national culture affects a person in a number of ways ranging from the deeply underlying to the readily apparent: values, cognitive schema, demeanour and language. These nationality-derived qualities in turn affect a person’s behaviour, as well as how the person is perceived in a group or environment made up of a number of different nationalities. In some cases it appears that the cultural diversity brings positive benefits to the group, while in other cases the diversity can create great difficulties. For the SSC it is important to appreciate that: ■

culture is complex and is made up of different elements such as values, beliefs, attitudes, etc.;

■

culture is dynamic and evolutionary and is constantly changing;

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culture is acquired and learned and is part of the socialization process;

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culture is everywhere and while we see evidence of it everywhere in the SSC, it’s very difficult to tie down.

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Fig. 7.1

The different cultures that may be at work in the SSC setting

Organization corporate culture

Functional culture professional – vocational group

Ethnic culture within regions or across national states

Industrial culture – industry or market sectors

National culture in which it operates or employees come from

AREAS WHERE CULTURE AFFECTS THE SSC The impact of culture on the SSC can be seen in a number of key areas.

The deployment of standardized processes Research suggests that differences in processes across cultures mitigate against employing standardized technologies and can lead to difficulties in enforcing common standards of service quality. In particular, local controllers tend to continually modify the SSCs recommended approach and, as a result, firms can end up with multiple process versions across Europe. This is a source of particular difficulty when the SSC wants to implement a standardized corporate-wide ERP system. In the case of one UK-based SSC, the director argued that as a US MNC the firm felt the need to roll out the corporate approach to business processes across Europe and to eliminate, as he termed it, ‘costly national differences in approaches to basic accounting processes’. Requests by French controllers to maintain a separate French chart of accounts were overruled.

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The loss of face-to-face service Before shared services the local organization could just ‘go across the corridor’ to find information. Under the SSC approach this direct contact is lost and staff must rely instead on phone and e-mail contact. In some cases firms feel the need to leave customer-facing activities at the local site.

The role of US GAAP The move to the SSC often brings the role of local GAAP and US or International Accounting Standards (IAS) GAAP into conflict. The overriding dominance of US/UK GAAP can be an issue for some staff in the SSC setting. In some cases local controllers will make strenuous efforts to prevent the move to standardize on US accounting procedures within local charts of accounts. Sites may resort to citing national legislation and fiscal controls to prevent the move towards standardization. In other cases the attempts to frustrate the move to a single GAAP approach at the SSC are more subtle and involve, as one SSC director put it, ‘socializing us to death’ during visits to the local sites.

Face to face with culture for the first time Many SSCs involve the centralization of pan-European operations to a single location. The resulting single multilingual locations are not without problems. Many accountants find themselves for the first time faced with multicultural staff and language intensive processes. The shortage/lack of language skills and the lack of experience in handling cultural conflict are quickly apparent. Research by the author found that accountants in many cases feel poorly equipped to handle the cultural challenges involved in managing 100 plus staff from 15 different countries. Sadly in some cases the response has been to try to force staff to operate in a US MNC monoculture.

The price of diversity Diverse national culture, as we have seen, can increase process diversity, complexity and costs. Combined with the shortage of language skills, this has led some firms to begin removing the language element from the process. This was perceived as the best way to eliminate cultural tensions but it also allows the firm to become more efficient and achieve better economic returns. Through the introduction of technology and through the redesign of processes some managers hope to make the SSCs monolingual by driving out the foreign language element and thus minimizing intercultural communication problems. This approach may backfire in the long

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term by depriving the SSC of the creativity and flexibility which diversity can so often bring, particularly when struggling to redesign customer-facing processes.

The choice of location The location of the shared services organization is a key strategic decision that commits the path that the shared services organization will take. Emotionally most people are committed to a preferred place. Some SSC directors will approach the decision with biases against locations or a very set short list of locations. It is important that the cultural preferences or biases of any one individual are not allowed to excessively influence the location decision. It is also important that a great deal of thought and critical analysis be placed on this decision since once the decision is made, most organizations are committed for a long period of time. It had better be the right decision.

Staff turnover In ACCA sponsored research on SSCs over 70 per cent of respondents said that staff turnover was a major drawback in the implementation of the SSC strategy. Attracting and retaining a large number of multilingual staff in what is often considered remote locations is a common problem for firms in this study. Staff turnover among non-nationals and difficulties in retaining staff beyond 18 months were reported by a large number of firms. SSC managers need to be continually looking for ways of reducing the sense of isolation and loneliness that many expatriates feel. This should include specific initiatives in the areas of weekend social events, etc.

Tensions ‘in-country’ As tasks are migrated to the shared service centre, there is the inevitable loss of jobs in the local organization. Some staff members may be able to move to another business unit. However, for the majority this is not an option as they may not have the required skill set and the costs of retraining may be higher than the cost savings generated by the move to a shared services strategy. Many of these local staff are sources of critical knowledge and this knowledge is lost to the organization for ever. As part of the migration to the FSSC, staff from the centre will often spend up to three months workshadowing their colleagues in the different sites around Europe. In the case of one SSC a large team completed the migration of all of the financial accounting operations from Italy (Milan) back to Dublin. As part of the

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migration the team spent three months learning how local staff carried out various processes. In nearly all cases those being shadowed were effectively being replaced in the organization by the shadowers. This was a particularly difficult task and one that required a lot of management time and several interventions. In the case of one firm, staff were flown back to the SSC each weekend because of the feeling of isolation they felt at the local site and the hostile nature of the relationship between the SSC staff and local accounting staff. On a more bizarre note, the turmoil of migration appears to hold a certain attraction for some staff. We found evidence of nomadic accountants who specialized in helping firms migrate to shared service centres. These self-appointed enforcers seem to relish the cultural challenges of moving established processes to new centres. Within the industry they are highly prized for the migration period of the SSC but tend to be disruptive for the organization in the longer term.

CULTURE SHOCK AND INTERCULTURAL ADAPTATION Differences in expectations regarding cultural and communication norms gave rise to frequent misunderstandings. Staff arriving in the SSC from different countries will typically experience culture shock in the form of: ■

frustration and fatigue from language difficulties;

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anxiety in the face of cultural differences;

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stress or feeling of impotence for being unable to cope with tasks;

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pressure and strain that comes from trying to conform;

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social alienation in the loss of friends, family and social status;

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financial difficulties;

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interpersonal conflict;

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loneliness, homesickness, isolation and disorientation.

The process of adaptation is one that is well documented with staff typically going through four main phases as outlined in Table 7.1. Managers in the SSC setting can support cultural adaptation and better intercultural relations in a number of ways including: ■

cultivating an environment in which all employees can demonstrate their ability and value to the organization regardless of race, culture or gender;

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■

putting in place appraisal systems that focus on performance and outcomes;

■

matching people and jobs to ensure full utilization of skills;

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supporting diverse work styles and life needs;

What’s this thing called culture?

■

putting in place intercultural sensitivity and training programmes to increase awareness of culture, develop communication skills and lessen likelihood of misunderstanding;

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encouraging and rewarding behavioural flexibility.

Table 7.1

Stages in adaptation

Initial euphoria

Excitement and fascination of new culture and new experiences. Curiosity and willingness to overlook differences.

Frustration and hostility

Facing the challenges of the new culture on a day-to-day basis. Confusion and disintegration and challenge to beliefs, values, behaviours, etc.

Adjustment and coping

Learning responses and adapting to new environment. Following social and cultural norms. Growing personal flexibility.

Integration

Cultivated understanding of host culture. Recovered from symptoms of culture shock. Freedom and capacity for dual or multiple cultural identities.

CONCLUSION The major causes of difficulty in SSC implementation are not legal and technical but more often in the realm of organizational culture, language and change management. Complexities of language and culture are frequently used as reasons not to implement shared services. Genuine, well-intentioned arguments for service excellence frequently mask delaying tactics by would-be resisters. It is important to deal sensitively with issues of culture and language. In particular, differences in expectations regarding cultural and communication norms give rise to frequent misunderstandings and a need to continually modify accepted ‘Anglo-Saxon’ work practices to the European environment. It is vital that SSC practitioners become acquainted with the notion of cultural fluency for their transnational and transcultural work in Europe and elsewhere. While language fluency in a number of tongues may be highly desirable, cultural fluency is downright indispensable for SSC managers. Careful planning and selective hiring or transfer of the right skills is necessary. The scale provided by shared service centres makes these issues easier to deal with, and the cost reductions and general improvement in service quality more than compensate for the effort involved.

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8 Performance monitoring and benchmarking

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Introduction

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What business unit clients want from their SSC

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The role of SLA’s measurement and reporting

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The SSC scorecard

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Comparing performance – the role of benchmarking

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Conclusion

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INTRODUCTION The leadership of internal shared services organizations today is under a tremendous, contradictory pressure: to do more with less. You must reduce costs – and improve customer satisfaction levels at the same time – to remain competitive with outsource service providers. The best run internal service organizations are coping with these new demands by aligning their service offerings with corporate strategy and placing their internal customers at the centre of their service priorities. In essence, they achieve excellence by operating as an ‘internal services company’ (ISCO). The ISCO model balances the forces of supply and demand and market efficiency, thereby enabling the services organization not only to attract internal paying customers with services they really need, but also to optimize internal and external delivery resources and demonstrate the value delivered in a tangible way. Measuring the value of shared services is essential, as it provides the burden of proof. Measurement demonstrates that a case for action resulted in the correct decision; that a strategy has added value to an organization. It is necessary to prove, beyond doubt, that the shift to a shared services environment has resulted in cost-saving and efficiency improvements. Since the shared services unit will be required to continually justify its existence, it will also need to commit itself to the ongoing measurement of results. The dilemma is in choosing what kind of measures, how many measures and what kind of processes to measure. It is an accepted truism that what gets measured, gets done, so companies need to be careful that what they are measuring is what they want done. The most common measurement error is to focus on costs and adherence to a budget, sometimes at the expense of other opportunities. The fact is that any one measure is unlikely to be sufficient.

WHAT BUSINESS UNIT CLIENTS WANT FROM THEIR SSC Clients primarily look for availability of and access to shared services. Some of these clients will work outside what the unit may think of as normal office hours and may be located in different countries to the shared services unit. One way to satisfy their needs is to introduce flexible working arrangements, or to have a rota of standby operatives, aided by paging/messaging technology. A second important client requirement is accuracy. When clients receive information that is inaccurate or incorrect, they begin to mistrust the unit as a whole and will try to find ways to go around it. As well as flexible working hours, some shared services units will need to demonstrate adaptability in meeting clients’ diverse cultural needs and expectations. In addition, the usability of products and services supplied is a key factor in achieving positive or negative client feedback.

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From processes, we move on to relationships. Clients look for the empathy, courtesy and commitment that they feel is lacking from centralized, bureaucratic departments. An unhelpful attitude is apparent from the moment a client call is answered, and first impressions last. Once staff show that they are willing to be helpful, they also need to display credibility in their ability to provide assistance. Training and sometimes bringing in the necessary expertise go a long way towards achieving a professional image. ‘You’re only as good as your last performance’ is certainly true of the shared services environment. You may have spent months concentrating on providing a first-class service, but this can all be undone with one failure. Dependability is, therefore, of crucial importance in maintaining a high level of service and client satisfaction. Finally, a staff member’s responsiveness to a client request will shape the client’s perception of the whole unit. This does not mean agreeing to unreasonable client demands, but working through the specific problem or situation with the client.

THE ROLE OF SLA’S MEASUREMENT AND REPORTING Successful SSCs provide their clients/customers with detailed performance reports on a regular basis. Along with SLAs these reports help to ensure that targets are agreed and that expectations are met. Some SSCs have formal SLAs which define the relationship between the centre and the client organizations. The SSC and the local business units it serves must clearly understand and agree on issues such as service expectations, performance measurement and dispute resolution arrangements. Any informal agreements that are in place must engender a similar level of understanding and awareness of responsibilities and expectations. As shown in Figure 8.1 just under half (46 per cent) of the respondents in the Andersen/akris.com 2001 survey use formal contracts, such as an SLA that describes the services to be provided, when they are to be provided and at what level of quality and cost; 19 per cent use a contract that simply outlines the services to be provided. A significant 23 per cent do not have a formal agreement between the SSC and its customers, while a further 12 per cent use some other type of agreement. This represents a worrying trend away from the use of formal service agreements: in this survey 65 per cent of respondents used a contract to establish the relationship between shared services and internal clients. This compares to 75 per cent of respondents in the 1999 survey. Service level agreements were originally conceived as an ‘insurance policy’ to safeguard future quality of service. Shared service centres must be held accountable to their internal clients, with a clear view of who their customers are and how to improve performance. Otherwise, what’s being delivered is centralization in SSC clothing.

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Fig. 8.1

The level of adoption of SLAs (%)

12

19 46

23

SLA contract (describes services, quality and cost) No agreements SLA contract (describes services only) Other types of agreement

Source: Andersen/akris.com survey (2001)

An SLA is the contract that defines the relationship between the shared services supplier and a client. These contracts need to be simple and clear; they are not in place to define the resolution of every conceivable circumstance that could arise in the course of doing business. The advice that is provided consistently over time by shared services organizations is ‘make them simple’. It is essential not to create a bureaucratic infrastructure with complicated SLAs that include pages of legalistic boilerplate and ‘what ifs’. This simply won’t work and will add enormous costs to the shared services organization. Therefore there has to be a principle for simplicity up front. In organizations where there is low trust and low mutual respect, business units have been known to press for more complexity than need be. This is where business units will want endless standards spelled out like legal service contracts with external suppliers. In this case, it is critical to try and accommodate their needs. Ideally SLAs are about one to two pages in length and spell out the description of services and the standards of service such as response time or quality. For example, do you commit to providing an accuracy rate of 100 per cent or a response time on the help desk of within half an hour? While ideally the SLA should be a short concise document, it must also cover the following areas: ■

what the client expects;

■

what the supplier will supply or deliver;

■

how frequently it will be supplied;

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■

to what quality standard;

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what the client’s obligations are;

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what happens if the supplier doesn’t meet these expectations;

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what happens if the client doesn’t meet their obligations;

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what recourse both have if there is failure on both sides;

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a description of the services to be provided, including end products to be delivered;

■

skills that the supplier must possess, and levels of service to be provided;

■

pricing and billing, including charges for services provided and the charging method;

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service standards, including deadlines, timescales, response times and other specific performance indicators.

Research by the authors indicates that the majority of organizations use measures based on volumes, timeliness and quality of services as the basis for their SLAs (see Table 8.1). Reporting of performance measures will typically be done on a monthly basis or in some cases quarterly. A key part of the SLA will usually be customer/client satisfaction surveys. These are a useful way of highlighting problem areas and can be used to direct problem resolution at regular meetings between SSC management and the client organizations. Table 8.1

Examples of SSC measures by process

Travel and expenses (T&E)

General ledger/Consolidation

T&E reports per full-time equivalent (FTE) Cost per T&E report

Number of days to close FTE days for close Materiality cut-offs

Accounts receivable

Accounts payable

Cost of remittance Remittance per FTE Days outstanding Credit checks per FTE Customers per FTE Incorrect invoices

Cost per accounts payable invoice Accounts payable invoices per FTE Percentage of payments automatched Volume of Internet and online purchases

Fixed assets

Cash and bank

Cost per fixed asset Fixed assets per FTE

Percentage of FTE payments Idle cash balances

Kaiser Permanente describes four steps to the development of an SLA. The steps, illustrated in Table 8.2, start with an initial identification of what services are being

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considered for which client and generally how the relationship will be defined between the players. The second step involves defining the responsibilities of both the shared services provider and the business unit client. This step also includes a description of how the services will flow to the client. Once these basics are defined and agreed, the specifics of what services will be provided, at what cost and within what standards of performance are negotiated. This step also includes agreement on what consequences, positive and negative, there will be for performance above or below the agreed performance standard. The final step describes the review process necessary to ensure the required levels of performance and client satisfaction are achieved. Table 8.2

Four steps to SLA definition

1. Identify

2. Define

3. Negotiate

4. Review

Scope: What are the services provided by the shared service centre?

Responsibilities: What is the delineation of responsibility between the shared service centre and the business unit?

Responsiveness: What are the agreed service levels?

Performance: Did the shared service centre meet its targets?

Participants: Which business units are involved? Relationships: How are service centres related to each other? How is each service centre related to each business unit?

Requirements: What capabilities are required by the business units? Interfaces: How will information and services flow between the service centre and the business unit?

Costs: What will the client pay for the services provided? Measures: How will the parties measure responsiveness and accuracy? Consequences: What are each party’s incentives, bonuses and penalties?

Compliance: Did each party comply with the defined agreement? Satisfaction: Are both parties satisfied with the results? Scope: Are there other products or services that must be included in the next agreement?

Source: Kaiser Permanente

One key issue with SLAs is at what level they are signed. It is recommended that SLAs be signed at the senior executive level of the business unit. Generally, this agreement should cover the core products and services. The rationale for one major SLA per business unit is to avoid middle management wheeling and dealing, cherry picking services as they see fit. One major SLA gives overall agreement on the core suite of products and services as well as an estimate of how much discretionary service they plan on purchasing.

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In the first year of shared services operation, it is essential to get a good handle on the expectations for service volumes and level. Service level agreements are a way of doing this. The other advantage of SLAs is that they provide a useful vehicle for educating clients in informal ways about how and why rates are the way they are, and what is done on their behalf. This is frequently the first time that clients develop an understanding of what services are provided and what goes into the provision. They may find out, for example, that it costs them money when corporate and internal units double check inputs from the business units. There should be an annual reporting back to the CEO, CFO and executive group on the results and outcomes of the shared services past operating year. This is a good business practice and one that is an effective method for holding shared services accountable for progress. The reporting out needs to include the target and the actual rate of recovery of fully loaded costs. In addition to the financials, there should be an overview of the internal client feedback, pointing out the biggest areas of strength and the areas for improvement. There needs to be an accompanying action plan for addressing the areas requiring improvement. At this time, it would be wise for shared services to make any recommendations on changes in the principles and to give any advice on services that should be outsourced. In other words, the outsourcing decision should ultimately be left up to the CEO and executive. This annual reporting time is a taking stock of the past year with a nod to the future. For example, if the past year has shown that in one area of service, the costs are still too high compared to external vendors and the client satisfaction is low, this is an obvious choice for outsourcing. The executive may still choose to retain this service in-house even though the data is compelling, but will ask the shared services group to work harder at either lowering costs or improving satisfaction. After all, this is not a simple mathematical formula.

THE SSC SCORECARD The balanced scorecard approach directly connects a shared services unit to the company’s overall corporate or organizational direction, providing consistency to performance measures. It provides a strategic focus for performance measurement that goes beyond the traditional focus on financial data. In the context of shared services, four measurement criteria are used: ■

the way internal clients and customers evaluate the services;

■

the extent to which the shared services unit is able to demonstrate innovation and value;

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■

the ultimate financial returns;

■

internal productivity in running the unit.

Performance monitoring and benchmarking

These four measurements provide a comprehensive picture of how the shared services unit is operating and can also be used as a basis for dialogue with clients about future improvements. The shared services unit must be committed to acting upon the data, however, if it is to lend any long-term credibility to the process.

Innovation and value Shared services units must demonstrate a commitment to the continual development of new skills and capabilities, aimed at enhancing service quality and operational efficiency. This is very difficult to measure precisely and to attempt to do so would be missing the point. The important thing is to ensure that the shared services unit looks beyond the traditional measures of quality, cost and client satisfaction, and continually tries to improve its value to the organization as a whole.

Financial returns Like any other business unit, shared services needs to compare costs against revenue. If costs exceed revenue, two options are available to redress the balance: reduce costs or raise the price of services. Since the latter will affect the unit’s competitiveness, it is usually seen as a last resort. The unit should already have processes in place to reduce costs and a further examination of these is the best way forward.

Internal productivity Every business unit has its own internal set of measurement criteria, which relate to its unique processes, products and services. Detailed process-based measurements enable shared services units to predict potential areas of decreasing or increasing productivity. These, in turn, form the basis for decisions on process improvements or alternative cost-reduction strategies.

Customers and markets Experience shows that there are few jobs tougher than marketing services as an internal service provider. Selling services to colleagues is a challenge – those colleagues may know you and respect your abilities, but they’ll compare you with external service providers who have the image and credibility that you as an internal provider may not yet have attained. External providers have proven their ability to do the job – they’ve found customers who are willing to pay for their advice. And it’s advice that doesn’t come loaded with any of the political baggage that you, as a fellow employee, may carry.

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A well-implemented business plan provides a rational, economic basis for operating internal services. It’s the basis for ensuring that every member of the service team is dedicated to meeting clients’ needs, by providing services of a quality, timeliness and cost that meet clients’ expectations and are competitive. We refer to internal customers of shared services as ‘clients’, in order to distinguish them from the organization’s customers. It starts with understanding your clients’ needs and ends with consistently delivering services they value. You’ll judge success by the extent that clients repeatedly choose to work with you. Even if they don’t appear to have a choice, your clients will find ways of letting you know when you’re not delivering value.

COMPARING PERFORMANCE – THE ROLE OF BENCHMARKING Benchmarking involves the comparison of internal service costs with those of external service providers, or others that may be considered ‘best in class’ (see Figure 8.2). Fig. 8.2

The nature of SSC benchmarking

Best-in-class performance

Benchmarking helps set goals and strategy for how to close the gap Performance

Benchmarking maintains the stimulus for continuous improvement Current performance

Gap Benchmarking helps to measure success in closing the gap Benchmarking identifies and calibrates the gap Time

Benchmarking data, like any other statistical comparison, is highly susceptible to interpretation. Great care must be taken to ensure that the services being compared are similar and that cost comparisons are relevant and reliable. Internal

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service costs should include all costs associated with the delivery of that service, including asset depreciation, for example. It is only valid to compare fully loaded internal service costs to those charged by external suppliers. This may go some way to explaining the low level of adoption of external benchmarking by SSCs as shown in the akris.com survey for 2001 (see Figure 8.3). Fig. 8.3

Methods used for monitoring SSC performance (%)

9 Other methods are used 2 Benchmarking with units that do not have shared services 2 Benchmarking with other shared services in the organization 10 Benchmarking cost, quality and timeliness of services with external suppliers 10 Benchmarking with shared services in other organizations 33 Regular meetings between shared services and internal clients 35 Monthly reporting of actual performance versus target

Source: Andersen/akris.com survey (2001)

In recent years a number of SSC industry interest groups have carried out benchmarking initiatives. Many of these, however, have lacked robustness and have failed to deliver the longitudinal data required by SSC managers. One of the more successful benchmarking projects in Europe was the KPMG best practice club. This measured a variety of processes across European finance operations both within the SSC setting and in traditional finance departments (see example in Figure 8.4). Benchmarking against similar services supplied by other internal shared services units often provides a more transparent and valid performance comparison. This can be extremely useful in defining targets for the new unit, not only for service costs but also for staffing and customer satisfaction levels. When it is impossible to

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make direct cost comparisons, a comparison of ratios is often a useful alternative (the number of employees for which one member of the human resources department is responsible, or the cost of processing one financial transaction). It is important to step back regularly and remind yourself of the reasons behind the benchmarking exercise. Ask yourself what the results will tell you about your business. When benchmarking training expenditure per employee, for example, is a high or low number preferable? Depending on your viewpoint, a high number can indicate either inefficiency or a stronger commitment to training. A high percentage of employees receiving training could demonstrate either a well-trained workforce or a lack of strategic training allocation. Similarly, the number of days’ training each employee receives is also open to interpretation. A high number can indicate a greater commitment to training, but by the same token a low number could indicate more efficient and effective workplace-based training.

Example of the benchmark from the KPMG SSC study

Fig. 8.4

Remittance advices processed per FTE (all companies) 90 000 80 000 70 000 60 000 All SSCs

50 000 40 000 30 000 20 000 10 000 0 10th percentile

1st quartile

Median

3rd quartile

Benchmarking can be an extremely valuable tool, especially during the first year of a new shared services unit’s operation. It should, however, be approached cautiously and open-mindedly. Only valid comparisons provide valid information and determining a comparison’s validity is often the hardest part of the exercise. Finally, social and institutional networks in the form of FSSC benchmarking clubs and even simple social get-togethers of FSSC managers provide a useful forum for getting what the head of Black and Decker’s FSSC calls ‘tips and tricks’. These are the useful insights which other FSSC managers have to offer and which are often more valuable than all the texts and benchmarking put together.

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CONCLUSION Defining the principles of operating, and designing the scorecards and SLAs all contribute to the transformation of an SSC into a business. They are important tools; they are the mechanics of shared services implementation. They are not the whole story though. The real key to implementing shared services successfully is the ability to shift the culture away from bureaucracy to a service mindset. There are many questions and dilemmas that will arise in the performance measurement process. The very process of performance measurement is what will start to change the culture for the shared services organization. It is an essential tool for change. For the leaders of shared services, the performance metrics are a key part of conversations with staff and with clients and it is these conversations which ultimately lead to action and improvements in service quality.

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9 E-shared services

■

Introduction

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How the web is transforming bean counting

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How the web is transforming shared services

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Challenges for e-shared services

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Lights-out processing: vision or hallucination

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Conclusion

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INTRODUCTION New technologies play a key role in the cross-border consolidation of information and financial systems. Information technology enables and facilitates activity consolidation as part of a shared services operation. Linking with the overall company’s IT strategy, the shared services must ‘capitalize on and match the available enabling technology’ (Schulman et al. 1999). One of the major revolutions in the business world today is the increasing automation of shared services delivery, with companies installing dedicated software to manage the process. In this chapter we take a closer look at the nature of e-shared services and explore how IT platforms can improve both productivity and latency. Most of the services that companies provide are recurring services that are well suited to automation and management by a software platform. Many companies initially install automation software to handle financial transactions, but it is clear that HR is also ripe for automation. Philip King, director of shared services at KPMG Consulting, has first-hand knowledge of the way automation is developing today. ‘It really started in finance’, he says. ‘Many of our clients were working with transforming their finance organization but, increasingly, the same principles are being adopted in HR, purchasing, IT, facilities management and other support organizations’. For now, though, the bedrock of most shared service centres is finance transaction processing: order to cash, purchase to pay and account to report. King says that in the early days of shared services, there was a large reliance on ERP (Enterprise Resource Planning) systems. ‘ERP systems were fundamental to achieving a true end-to-end process redesign, of which shared services was a part. Unfortunately, the initial ERP implementations were tough-going and ERP systems themselves weren’t so user-friendly. They didn’t really give a great customer service experience.’ Now, King says, vendors are responding with upgrades to these systems that are web-enabled, truly user-friendly, and have a better self-service capability. ‘We’re seeing the introduction of more sophisticated document-imaging technology. These technologies weren’t available until the last year or two.’ King explains, ‘We’ve set up, at our Enterprise Technology Centre in Watford, an e-finance capability that aims to have 95 per cent of transactions going through a purchase to pay process automatically – an integrated suite application that includes e-procurement and web-enabled expenses integrated with ERP. The shared service centre can monitor the process performance itself. We also have a document imaging system installed which can automatically read any paper invoices that arrive and post them directly into accounts payable. The purchase to pay is a classic example of processes that can be fully automated.’ Alex McInnes, Director, BPO Poland at PricewaterhouseCoopers, also sees accounts payable as particularly ripe for automation. ‘If you look at a web-enabled

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solution in accounts payable, you have a number of portals now coming online. The vendors, suppliers and clients could literally carry out transactions on a virtual basis without the need for a service vendor in the future. These are the vendor–client relationships that bring real opportunities for the future.’ King sees an interesting evolution in shared services. In his view, shared services has gone through a life cycle that is similar to manufacturing. ‘In the same way, shared services skills today need to move more towards process controllers than process administrators and transaction processors. That’s a key aspect that companies need to look at when they’re implementing the technology. What we envisage is that shared services will move towards more of a control room environment. As processes are automated, more functionality will come into shared services, such as data management, help desks and self-service applications. The shared service centres are likely to be global. You don’t need many people to administer web-enabled expenses. But the skills in the shared service centres need to change, and we need more hybrid-type people with IT and process skills.’ It’s not just finance processes which are moving online. Exult, a provider of webenabled, integrated services designed to manage the human resources function for Global Fortune 500 corporations, opened its new Glasgow, Scotland client service centre and uses the latest internet-enabled interactive technology. The centre is devoted to managing human resource functions for major global corporations. These functions include payroll processing, benefits administration, organization of training, and the related IT support and maintenance. Maintenance of key systems and technology such as call/case management, imaging and workflow, and HR application software and databases also fall under the responsibility of the new centre. One of the primary roles of the e-HR services centre is the support of Exult’s ‘myHR’, a browser-based, personalized web portal that promotes and enables employee self-service for key HR functions. ‘myHR’ is a customizable HR tool that creates a dynamic communications network among employees, employer, managers and their peers, and enables employees to self-manage various aspects of their professional lives.

HOW THE WEB IS TRANSFORMING BEAN COUNTING The days of bean counting are over for many finance professionals. The concept of e-finance is closer to reality than could have been anticipated two years ago, claims a new report, ‘eFinance@work’, by KPMG Consulting. In 1998, the firm predicted that due to changing business and operational models driven by Internet technologies, ‘accountants could go the way of coal miners’ if they did not adapt to the new environment within ten years. However, developments in e-business

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have been so rapid that these predictions have already been realized and companies need to make immediate changes to their finance departments to avoid the role of finance becoming sidelined. Scott Parker, consultant at KPMG Consulting, commented: ‘The role of the finance function within companies is changing dramatically. From now on, finance departments will drive, rather than measure, financial performance. While the traditional responsibilities of finance departments – forecasting, budgeting and financial control – will remain, many of the processes associated with these have been automated, freeing finance to become a strategic partner to the business.’ The report highlights the finance department’s role as an integrator and provider of information. This will involve liaising with external parties, such as suppliers and partners, and pulling together information from marketing, logistics and other departments in order to challenge decisions and business directions. This transition will require wholesale change within finance departments, both culturally and operationally. Up-skilling staff will be vital and there will be major change for finance directors themselves, who will move away from the traditional finance role to become more of a strategic consultant. The report explores the four key themes that will drive the new role of the finance department: ■

eliminate many of the traditional roles of the finance function: manual tasks – such as processing expense forms – are being automated and replaced with web-enabled systems. This could reduce processing costs by 20 per cent, although some companies achieve much more. As companies automate their processes and link directly with customers and suppliers, there will no longer be a need for large accounting factories in a single location. Before long, the shared service centres will essentially become control rooms monitoring performance, managing processes and tracking exceptions to the rule. In addition, organizations are finding that application service providers (ASPs) offer a solution. Companies can outsource IT to an ASP – servicing a number of businesses simultaneously – at one off-site location. It is expected that ASPs will be a popular option for many organizations.

■

embed financial controls and risk management in technology: as increased access to information delivers greater decision-making power across an organization, the potential risks for the organization also increase. However, new technology allows consistent procedures, tools and templates to be easily implemented. Cisco, for example, has adopted a web-based expenses system that enables the company to capture individual corporate credit card transactions online and employees to input other expenses on a daily basis, while flagging up consistent overspending on expenses, or the use of an unauthorized airline or hotel.

■

empower decision makers: chief executives have always wanted finance directors to deliver the Holy Grail of finance: making the finance function a strategic

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business partner. The Internet facilitates this role by allowing real-time, customized management information to be delivered through a web browser to employees on an anytime, anywhere basis. The performance management portal effectively provides a single and instant version of the truth, allowing the whole organization to manage performance against clear strategic priorities. Motorola, for example, uses a system which not only enables all its employees to have daily access to marketing and manufacturing information, but also incorporates paging technology to ensure that employees who are not near a PC can access the information they need, or be alerted to new developments with a two-minute response time. ■

Explore new opportunities: The specialist skills typically found in finance – tax, treasury, investor relations and corporate finance – are being profoundly affected by the Internet. This is having an impact both on the way these skills are delivered (common tax and treasury questions can now be answered over an intranet or Internet) and on the skills that are required, for example in co-ordinating a cross-border transaction. Finance will become much more project-based and finance professionals must develop and revamp the skills to meet this challenge. Chris Gant, partner responsible for e-finance at KPMG Consulting, commented: The back office revolution is already happening. However, while leading organizations such as Cisco, Virgin, Whitbread and Motorola are implementing the necessary changes already, many firms still have substantial ground to make up. Customers and suppliers are ultimately forcing all companies to meet the e-business challenge and there is no time to delay. The traditional finance department will not survive – finance must either adapt to the pace of change or risk becoming sidelined within an organization.

HOW THE WEB IS TRANSFORMING SHARED SERVICES Automation of the business mode to deliver end-to-end service chain automation Companies cannot reduce their costs by outsourcing or recentralizing shared services unless they have an automation platform that improves services. Service automation platforms have the potential to reduce service costs within enterprises by up to 30 per cent. In enterprises with 10 per cent margins that spend 3–5 per

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E-shared services

cent of revenues on services, this amounts to a profit increase of 10–15 per cent. Clearly, these are savings that fall directly to the bottom line. With the right software shared services can automate their entire service delivery chain with one fully integrated web-based system. Using self-service ordering, employees can request complex services as easily as ordering books on the Internet. One example of such software is RequestCentre by newScale of the USA. The software enables companies to define and publish service offerings, design and implement delivery processes and offer a central online portal for configuring and making service requests. They can flexibly define purchase authorization processes to meet their particular needs, manage business processes for procuring and deploying equipment and services, and effectively collaborate with outsourced service providers. The software also tracks performance and provides IT service organizations with the tools to connect to other corporate data sources.

Improved co-ordination Delivering shared services requires close co-ordination between those requesting the service and those providing it. With a dedicated software platform, companies are able to improve co-ordination on many different levels. Co-ordination goes far beyond pure interpersonal communication and e-mail. It involves the structuring, sequencing and synchronizing of people’s activities for efficient service delivery. With the right software in place, co-ordination is what results when service consumers and providers are clearly informed of all aspects of a service. This includes everything from defining people’s roles to obtaining equipment.

Eliminating call-backs The most tangible result of improved co-ordination is the elimination of call-backs (the phone calls or e-mails from service providers and consumers who need reconfirmation or clarification). Call-backs tend to increase in number as companies expand and service delivery becomes more complicated. By using a good services management platform, companies can eliminate call-backs at all three stages of delivery (see Table 9.1). A menu of clearly specified packages means there is no longer any ambiguity when customers are requesting a service. At the approval stage, management or departmental sign-offs can be mapped into the process so that everyone involved knows what is being requested and what has been approved. Co-ordination is also improved at the delivery stage thanks to a central bulletin board on which all relevant information is posted. All those involved can check what jobs are pending and how close each task is to completion. They can see, at a glance, what people’s roles actually are.

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Table 9.1

How automation software improves service delivery and management Co-ordination factors

Effects

Service ordering

Customers can clearly communicate their requests.

Call-backs and intermediaries eliminated.

Service delivery

Clear details available about people’s roles and delivery tasks. Task status is visible to all parties.

Co-ordination of people’s roles and the supply of equipment. Service delivery can be decentralized.

Service management

Centralized management. Service activities visible at macro (overall) and micro (per job) levels. Details available about internal and external teams and all jobs, including those that are pending.

Improved co-ordination in performance monitoring, billing, publishing of costs and charging. Report cards can be generated.

Synchronizing activities Service delivery is often hampered by a lack of synchronization. Some tasks have to be performed in sequence, but others can be done in parallel. For efficient service delivery, all these tasks need to be managed in a well-organized fashion – the more tasks that can be dealt with in parallel, the quicker a job can be completed (see Figure 9.1).

Streamlined ordering Automation software reduces costs by streamlining the ordering, delivery and management of shared services. It not only enables companies to synchronize parallel activities and eliminate call-backs, but also provides service managers with the data they need to assess and improve services and establish fair charges. Everyone involved is able to track the progression of each task and the whole process is simplified. Service offerings are packaged into a catalogue, service delivery personnel have a well-organized workflow and monitoring is easier to carry out. It becomes easier for managers to assess delivery performance and audit the impact of shared services on company finances.

Empowering shared services managers Over and above the evident process improvements, automation helps to empower shared services managers. With automation, shared services managers are no longer perceived as the bad cops all the time. Instead, they can focus on becoming 138

E-shared services

operationally efficient – every request has a price and therefore a profit. Shared services managers can say, ‘I’m now going to increase efficiency this way’, and newScale provides the dashboards that can make it happen. That’s very empowering for them and it’s one of the attractive features of automation. Automation allows shared services managers to become an operational showcase, a best-of-breed professional who has optimized service delivery in the organization.

Advantages of task synchronization

Job X

Fig. 9.1

Task A

Tasks fulfilled in rigid sequence Task B

Task A

Tasks, service jobs

Job Y

Task C Tasks fulfilled in parallel

Task B Task C

Time

Difference in time-tocompletion due to parallel fulfilment of tasks

Cutting costs Companies that automate their shared services management make both direct and indirect savings. First, fewer personnel are required to support the same level of service so labour costs are reduced. Second, improvements in latency lead to a significant reduction in opportunity costs. Opportunity costs include the sales opportunities that companies miss when they are slow to market new products and the buffer inventories they are obliged to carry out because their activities are unco-ordinated. Time and money are also lost when otherwise productive workers are left idle because a task needs completing (see Table 9.2 for further examples).

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Table 9.2

The costs of failing to automate

Opportunity costs

Cost to the company

Unnecessary use of contract labour and outsourcing

Expenditure on contract labour and outsourcing

Time to market with new products

Lost sales

Productivity of service customers (company employees)

Lost added value (employee revenue minus cost)

‘Just-in-case’ inventories of equipment, supplies and/or raw materials

Expenditure on inventories and cost of capital

Lost customer loyalty and repeat sales due to poor service

Lost sales

Time lost when opening new facilities

Daily cost of capital multiplied by the number of lost days

Case study 9.1

Lucent e-shared services in action Lucent Technologies, headquartered in Murray Hill, New Jersey, USA, with over 60 000 personnel in more than 90 countries, designs and delivers networks for the world’s largest communications service providers. Backed by the research and development activities of Bell Labs, Lucent relies on its strengths in mobility, optical, data and voice networking technologies as well as software and services to develop next-generation networks. Lucent Technologies was established as a result of the restructuring of AT&T in 1995. The company’s roots date back to Alexander Bell and his invention of the telephone in 1876. Lucent Technologies has been listed on the Stock Exchange since 30 April 1996. Lucent Technologies uses a central shared services model for its financial organization. Transaction intensive activities such as invoicing, accounts payable, payroll, cost accounting, accounts receivable and inventory accounting are done by the Global Financial Services organization. The Global Financial Services (GFS) organization operates as the centre of excellence for all GFS transaction processing. Each of the regional shared service centres aims at aligning closely with their regional controller as well as with the financial systems and processes team to deliver end-to-end process improvements. The main GFS activities cover the following areas:

140

■

day-to-day management of financial processes;

■

tax compliance and statutory results;

■

acquisition integration;

■

spin off business;

■

new process introduction;

E-shared services

■

migrating existing countries;

■

process ownership.

The finance mission is to add value to decision making at the best cost to the firm and to become an invaluable strategic business partner to the business. This mission includes the challenge of revamping systems and processes in order to make total finance costs to the corporation no more than 1 per cent of revenue. This cost reduction led to the creation of a dual FSSC solution in the EMEA region which is to provide centralized accounting services to all Lucent business units in the region and become a centre for excellence. In particular the shared service centre is tasked with: ■

reducing finance expense to less than 1 per cent of total revenue;

■

increasing partner satisfaction: more value added services/more time spent on client support;

■

establishing common processes, financial language and improved processing time;

■

delivering fast integration of new acquisitions;

■

improving finance process quality.

With this in mind, during the second quarter of 1998, the two scheduled European shared service centres initiated their start-up phase with the UK as the first country to be migrated into the shared services hubs. From here the shared service centres have moved to support the Netherlands, Germany, France, Poland, UK, Ireland, Portugal and Italy. While the Dutch FSSC hub carries out the general ledger, statutory accounting, project accounting, inventory and cash operations functions, the Irish hub is responsible for the accounts payable, inter-entity, accounts receivable/collection, cash application, fixed assets and employee expenses functions. Billing and payroll functions are run in-country with a trend towards outsourcing payroll functions. At present, activities at both SSC locations are structured by process. Table 9.3 summarizes the services provided at Lucent (whether at SSC, individually in-country, outsourced, etc.) and their characteristics. The ultimate goal for the GFS organization is to become a recognized strategic partner within the overall Lucent organization and to perform work that is truly relevant to the business needs. In this strategy, global process owners set the global processes first and the regional shared service centres implement the common processes, tailoring the strategy to the local environment. This search for best practices in financial processes with a final view to adopt them in all Lucent locations is enabled by technologically-based solutions such as the ones described in the next section. Some of the main technological enablers at Lucent Technologies’ shared services operations are outlined below. XMS: Lucent Technologies global expense management tool Since fiscal year 2000, Lucent has dramatically changed the expense management process. The new process, currently being implemented worldwide, utilizes a software package known as XMS (eXpense Management Solution) developed by Concur Technologies that replaces

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Shared Service Centres

multiple legacy expense management systems. XMS is a web-based application for submission, approval and payment of business expenses that enables Lucent to: ■

improve the visibility and management of the travel and expense process;

■

standardize the preparation of financial reports;

■

develop a more productive financial reporting;

■

embed Lucent corporate travel policies within the expense management process solution.

These and other benefits, as well as the challenges faced during implementation, are shown in detail in Table 9.4.

Table 9.3

Lucent EMEA business services: level of provision

Services

Provided (in-country, outsourced, regionally, globally)

Accounts receivable and payable Credit and collection Billing General ledger Financial analysis/reporting Consolidation Accounts payable Cash management Treasury Travel and expenses Procurement strategy Procurement operations Cost accounting Management of IT operations IT development Payroll Facilities management Health and safety External statutory and reporting Legal services and facilities management Compensation and benefits

SSC regionally SSC regionally In-country SSC regionally In-country Globally SSC regionally SSC regionally SSC regionally SSC regionally Globally In-country In-country SSC regionally Outsourced In-country outsourced In-country In-country In-country Outsourced In-country

With XMS, the process starts with the receipt of employees’ American Express credit card statements into the web-based system. Instead of completing per trip vouchers, Lucent employees process monthly expense reports by reconciling online American Express statement activity. The implementation in the EMEA region has been the responsibility of the Dublin shared service centre, and, after a period of requirements elicitation and analysis, which highlighted different tax policies, travel corporate policies, currency and language issues (among others), the business requirements were documented and agreed upon.

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Table 9.4

Lucent expense management tool: benefits and issues

Benefits ■ ■ ■ ■ ■ ■ ■

■

Improved process visibility Process standardization and reduction in T&E voucher processing time Legacy systems being decommissioned Online submittal and approval of expense reports Duplication of effort eliminated (no rekeying necessary) Non-compliant expenses reporting Improved management and procurement decision making regarding travel expenses (potential savings of 8% of T&E spend) VAT on expenses becomes reclaimable

Issues ■ ■

Implementation required higher than expected level of support Reporting became a very important aspect during implementation

The solution was then customized to support the business requirements identified. Extensive work followed in order to reengineer the back office expense process at the Lucent FSSC before the implementation could start. A three-month pilot period was chosen initially for the UK activities, which started in March 2001. Full implementation for the UK took place in June 2001 followed by the deployment of XMS platform to all EMEA countries, while at the same time looking closely at the EMEA travel and expense policies and processes in the region in an attempt to minimize Lucent’s exposure to risk. Scorpion: Lucent regional procurement card programme for EMEA With accounts payable being the biggest process area servicing Lucent subsidiaries in the EMEA region from the Dublin FSSC, senior management at Lucent realized the lack of automation in the SSC-run process and through a process review they triggered the start of a procurement card project, aiming at: ■

improving efficiency by automating the processing of low value, non-inventory business purchases of products and services (with effects on the whole end-to-end procurement cycle);

■

reducing processing costs through eliminating manual invoice processing, purchase order creation, vendor set-up and maintenance, etc.;

■

improving strategic vendor relationships.

The key business driver identified was the need to automate the processing of low value purchases, simplifying the process to reduce costs and the manual content. This analysis concluded that business benefits and the payback period of a year were attainable. The required solution would have to allow the deployment of a card programme over the EMEA

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region countries. Business requirements were gathered, followed by a comprehensive market analysis. The solution chosen was Deecal’s ‘Scorpion’, due to this vendor’s relationship with HSBC, a bank that has an important presence in Europe (chosen against Deecal’s US competitor product, Procard, which doesn’t have a presence in Europe or adequate bank relationships). The project then moved to develop the Deecal technical solution using a pilot implementation within the UK Lucent market, followed by a regional EMEA rollout. The project needed to be implemented in a very short timeframe, and the Deecal solution was successfully implemented in less than two months. The software vendor expertise and knowledge in implementing global commercial card programmes proved to be very important to the success of the project. During the implementation phase, business requirements were gathered for the project and the technical solution was built and presented, with a consultant carrying out the implementation. The database required was built in three weeks, during which several requirements changed. The final solution was successfully implemented on a local server with a multi-user system. Full training for the system users was given and then the solution went into production immediately with daily delivery. The UK went live initially, followed by Ireland and France. Lucent took over from the vendor the responsibility for updating the software to suit each new implementation. It has been running successfully for 18 months in the UK, Ireland, the Netherlands and France. EZBuy: Lucent global e-procurement solution In 2000 Lucent commenced the execution of a global e-procurement project, called EZBuy, which utilizes the ARIBA Buyer solution, an online buying system for indirect procurement through a strategic set of suppliers. In October 2000, Lucent finalized an agreement with Alliente Inc., a business service provider. This agreement stated that Alliente would host and manage the implementation of the Lucent e-procurement solution, a single global system for indirect procurement. Lucent goals in the procurement area are: ■

to leverage spending with strategic suppliers;

■

to become IT-enabled through a web-based tool that, once it becomes integrated across Lucent, will enable a reduction of costs and cycle times;

■

to shift focus to core competencies and business critical areas;

■

to reduce the number of indirect suppliers and increase the visibility towards spend.

Through the ARIBA Buyer solution, Lucent can purchases:

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■

office supplies/books;

■

capital equipment;

■

stationary and logo merchandise;

■

business and professional services;

■

industrial supplies and equipment;

■

computer hardware;

E-shared services

■

software;

■

other items requiring approvals through internal business processes.

During fiscal year 2001, Lucent deployed this solution globally for both catalogue and noncatalogue orders. Table 9.5 shows the key drivers, the objectives of the project and the characteristics of the solution implemented.

Table 9.5

Electronic procurement at Lucent

Key drivers

Project objectives

Solution implemented

1. Buyer fragmentation: internal Lucent personnel use multiple ways to buy 2. Low customer satisfaction: slowness, lack of tracking, maverick buying 3. Lack of strategic capability: lack of focus on strategic sourcing 4. Expensive process: high cost in purchase order processing 5. Supplier fragmentation: low buying power

Improve supplier management Improve access to suppliers Reduce processing costs Reduce order cycle time Quick implementation (using third party company expertise) Achieve process improvements, reducing maverick buying and manual reconciliations Online requisition approval After initial stage the project will aim at inventory goods

Connects buyers and sellers electronically: fewer suppliers and automation of transaction processing Gives controlled access to all employees

Alliente has brought into the project their knowledge gained through previous customer implementations and their international presence, which has allowed homogeneous and parallel implementation in all regions. Lucent employees use their browsers to search the digital catalogues negotiated with selected vendors, and these catalogues contain discounted prices agreed beforehand. EZBuy enhancements brought in in August 2001 allow the placement of non-catalogue orders via EZBuy as well as the possibility to create and change orders, and to cancel requisitions. EZBuy has been deployed globally in the USA and in 29 other countries. Within the EMEA region, the countries in which the solution has been deployed include the UK, France, the Netherlands, Spain, Italy, Portugal and Ireland. Key implementation issues included: ■

resistance to change on the side of the procurement organization and requesters at Lucent. Users are encouraged to access the web-based, self-paced training modules with easy to follow instructions and tips on navigating through the EZBuy system; Alliente’s Operations Centre is available for questions and comments; Lucent’s Supply Chain Networks group has a support web site regarding EZBuy.

■

Leading e-procurement applications are evolving (e.g. cross-border purchases issues). The Ariba solution is one of the best overall solutions available in the area of e-procurement.

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Shared Service Centres

■

suppliers’ readiness is the main challenge. Suppliers’ catalogue content is on some occasions inadequate with technical errors, obsolete products, poor descriptions. Suppliers in many countries are unable to provide an Ariba catalogue dedicated to Lucent (e.g. suppliers using different tools than Ariba).

■

clumsy processes linking Lucent to suppliers: lack of influence when advising suppliers of the type of technology required for e-procurement.

EZFlow: Lucent regional imaging and document approval system With a complex financial architecture and a number of ERP systems (SAP, Oracle, MFGPro) due to multiple business acquisitions, the accounts payable activities carried out in the Dublin FSSC presented many challenges. They process more than 350 000 invoices per year for subsidiaries in Germany, the Netherlands, the UK, Poland, France, Ireland, Portugal and Belgium in the EMEA region. The level of purchase order bypass was considerably high (on average, around 60 per cent of the invoices). In addition to encouraging the organization to raise purchase orders, obtaining approval for these invoices has been difficult and the whole activity was clearly inefficient and cumbersome. At the same time, there was a requirement for certification when the so-called service purchase orders where used. This meant that service certification was then necessary for many charges that had been approved originally through a purchase order. The tool chosen to address the issues above was EZFlow (see Table 9.6). The original implementation, focused on the Netherlands accounts payable group, went live in October 2000 as a pilot with basic functionality for a few key approvers. The pilot moved to full implementation (again for the Netherlands accounts payable group) in March 2001 with new improved functionality before being rolled out to the rest of EMEA, for both the interentity and third party accounts payable processes.

Table 9.6

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Electronic imaging and workflow at Lucent

Key drivers

Project objectives

Solution implemented

1. Regional document archiving and approval process 2. Visibility and control of invoice approval, purchase order bypassing, etc. issues 3. Automation and simplification of process, thus reducing costs by minimizing manual content in the accounts payable process

Implement an efficient scanning and invoice approval process Enable visibility of issues Cost reduction Visibility of non-conformist within the approval process

An electronic imaging and workflow information system that gives the accounts payable function real time visibility over the invoice approval system Tool that enables the accounts payable process to produce internal efficiencies

E-shared services

This tool brings important benefits to internal and external partners in the region, due to the fact that it enables both in-country partners and Lucent staff in the Dublin FSSC to process a range of transactions electronically. In addition, SSC and other staff regionally or globally can access scanned images of invoices for analysis or process and send for online approval, and in-country requestors/approvers can, using an online link, view the documents and approve/reject them via a standard web interface. Critical success factors, risks and drivers Table 9.7 summarizes the main technological enablers at Lucent FSSC, the drivers incorporated into the business case, the factors that proved critical for their implementation and the specific risks that were introduced. Tools and technologies deployed in the EMEA region (FSSC driven) include ERP, data warehousing, data analysis and reporting tools, EDI, intranet and electronic procurement. Tools in which investment is deemed as necessary are, among others, automatic payment allocation tools, EDI, EAI technologies and extranet. A common view across Lucent is that the main priority for investment within the FSSC is people related, and within this area, the main challenges have to do with providing growth opportunities and automation tools, retaining key resources and employee recognition, as well as hiring the right talent for the FSSC. Challenges in the process area (second priority for investment) relate to the standardization of processes, reengineering the end-to-end processes before building automation (increasing the integration between billing, procurement, accounts payable and cash management functions) and dealing with change management issues. Finally, the challenges in the IT strategy at the FSSC (third priority for investment) are achieving an IT strategy in line with the SSC strategy, the deployment of an ERP and the decommissioning of legacy systems with the aim of having a unique IT platform. While recognizing the need for new IT systems, management at Lucent realized that no successful IT implementation could be achieved without a global vision in which the human and process elements play a pivotal role. Recruiting the right people, implementing the SSC IT strategy and building around core processes became the stepping-stones towards bringing the finance organization into alignment with the overall corporate strategy. Traditional views of the processes were abandoned and a change in mindset started to take place: from viewing the organization as a conglomerate of business functions (purchasing, production, logistics, finance, etc.) to viewing the end-to-end processes, the value-chain perspective, in which activities are chained together and different business and corporate units are related more closely in the process. Business process owners become key to improving processes and bringing a new perspective to the organization. Within EMEA the challenge consisted of: ■

bringing together a non-homogeneous internal market into an SSC model (regarding processes, systems, procurement environment, taxes, schedules of authorization, currency issues, etc.);

■

managing change and internal customer expectations throughout;

■

facing inefficiencies in the processes/activities migrated.

147

Purchasing card

Definition and agreement on the strategy and setting of objectives

e-expense

Change manager paying particular attention to new processes

VAT accreditation needs to be acquired in all European countries

Alignment of vendors

Engagement of business partners, particularly the Supply Chain Networks organization

Build project plan in partnership with AMEX

Risk of duplicate payment to vendors via different processes

Ongoing communication to reinforce policy and process

No procurement card programme in place in some countries

Organizational culture of non-compliance

Euro compliance

Adequate resource planning; resources with right skill sets: change management and systems consultants

Use of preferred suppliers

Regional policy and process programme solution for low value purchases

Systems decommissioning

Consolidate to one global process policy for travel and expenses

Incremental recovery of VAT

Procurement leverage

Resistance to change Local perceptions of ‘required’ differences versus large scope

Reduction in headcount

Drivers

Restructuring

Risks

Understand/address local requirements and cultural differences

Engagement of target groups, i.e. employees

Critical success factors

Analysis of the implementation of main IS projects at Lucent FSSC

Project

Table 9.7

e-workflow

e-procurement

Project

Table 9.7

Implementation costs escalation Involving multiple type of users: change management issues, resistance

Frequent communication on objectives and progress

Ongoing communication to reinforce policy and process

Obtaining common processes across borders to support a global rollout

Risks

Stakeholder buy-in

Clear communication on benefits

Senior management sponsorship

Stakeholder buy-in

Good control process related to the approval of spend and compliance in returning invoices to enable VAT reclaim

Regional partnership with credit card provider/bank

Critical success factors

continued

Visibility/control over the purchasing process

Cost reduction

Efficient regional electronic archiving and approval process for payables

Use of preferred suppliers/Eliminate purchase order bypass

Reduce process costs

Leverage purchasing spend on a global basis

Drivers

Shared Service Centres

In pursuit of the overall vision of achieving an integrated process, an integrated business solution that could leverage the technology available was sought. The business drivers included: ■

the need for new efficient, streamlined and simplified processes which would minimize the non-value added activities;

■

increased span of control: higher visibility and control of issues;

■

process automation;

■

the need for global processes and global systems;

■

the need to leverage purchasing spend.

Tables 9.8 and 9.9 summarize the critical success factors in the people and process areas associated with implementing new information systems at Lucent.

Table 9.8

People-related critical success factors in IT implementations at Lucent

Critical success factors – People ■

Senior management commitment

■

Buy-in at all levels of management

■

Engagement of employees and key process partners

■

Education and training programme for employees

■

Implementation team with out-of-the-box view, flexible mindset and problem resolution skills

■

Continuously communicating, understanding and managing change (within the implementation plan)

■

Partnership with the human resource organization regarding SSC staffing

Table 9.9

Process-related critical success factors in IT implementations at Lucent

Critical success factor – Process

150

■

Global processes

■

Process ownership (and process owners)

■

Accounting processes and local requirements focus

■

Accurate reporting

■

Management of process partners though KPIs, SLAs and balanced score card

■

Processes to support the business and add value to the organization

■

Process simplification

■

Alignment of processes and systems

■

Benefits realization

■

Communication on results, performance, changes, etc., as per process, to all key people

E-shared services

Lessons learned Lucent FSSC management is aware of the need to make use of the electronic business challenge in order to get closer to the business units. In an attempt to exploit e-SSC technologies Lucent has learned a number of valuable lessons including the following: ■

finance function goals (cost savings and efficiencies, process standardization, efficient global end-to-end processes, better visibility of information) require the implementation of electronic enablers in the form of new technologies such as ERP, data warehousing, data analysis and reporting tools, EDI, intranet, e-procurement, automatic payment allocation tools, EAI, extranet, etc.;

■

the implementation of new information systems brings major challenges to different areas: to people, where automation tools and growth opportunities interfere with work practices; to processes, with standardization and reengineering being the main issues that must be addressed; in the IT area where the trend is towards decommissioning legacy systems and towards a unique IT platform (ERP) and an IT strategy aligned with the SSC strategy;

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Analyses of current and past implementations indicate the need for careful change management methodology to be in place regarding IS/IT implementations, in particular: – frequent communication on objectives and progress at all stages during the IS/IT implementation; – careful selection of the solutions required and comprehensive vendor analysis (to avoid clumsy processes linking Lucent to suppliers or business partners); – project assessment and planning to ensure that the SSC has the resources and is ready to undergo the necessary changes (e.g. supplier readiness, leadership support, organizational and cultural readiness); – addressing resistance to change by business partner organizations and SSC staff (communication, training, etc.); – developing a project management methodology and strong project management skills within the implementation teams (to maintain involvement and meet deadlines); – managing business expectations and business requirements throughout the projects; – involving/engaging users in target groups from the earliest stages of the projects.

In the future Lucent will continue to extend the reach and range of its e-SSC technologies to leverage long-term comparative advantage.

CHALLENGES FOR E-SHARED SERVICES Finding the right solution – single-instance software Disagreement between different sites is often the main factor that has slowed down the automation of shared services. It takes time to find suitable solutions for companies that have operations in many different countries, all of which may be

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using different software. These are not pure systems barriers – it can depend very much on the culture of the company and how they could actually drive change within the company. Peter Moller of Deloitte and Touche argues that a major factor is the advent of a single instance of ERP. He cites the example of Oracle, who turned to Andersen for help in building a shared service centre. To outsiders, Moller says, Oracle appeared to run on the same software throughout Europe, but the software was not, in fact, the same everywhere. ‘What they have now done is to move on to a single instance of their software worldwide, so that all of the countries effectively access the same database. Single-instance software is a tremendous enabler for internal integration within business units. No one was doing that ten years ago. They just didn’t have the capability to have the single instance of software that everyone could use around the world. Now most software companies are moving towards that goal.’

Deploying self-service software using the web Another factor, according to Moller, is the advent of ‘self-service software’. Employees can now process their own expense claims and make their own changes to personnel administration records. They can process a purchase order and have it approved online. All this, Moller says, has been hugely enabled by the Internet and workflow software. ‘We’re replacing paper chases around the organization and invoices being lost in in-trays and out-trays. It’s all going online and people now have e-mail alerts telling them they need to authorize something. In a couple of clicks, they’ve authorized it. It automatically goes through and gets processed.’

Effective interfacing between applications While automation is simple in an organization that has one business unit, one type of customer and supplier, things become much more complicated for a company that needs to interface with a multitude of different business units and different locations, customers and suppliers, all of whom are using slightly different technologies. The problem then is one of integration. The advent of much better EAI, or middleware, is extremely important. Rather than having to take information from one system and rekey it into another, EAI creates automated links between many systems. Five or six legacy systems and manual interfaces between each of them are difficult to maintain and update, as well as confusing to operate. With EAI software firms can create a new hub, then interface all of the legacy systems into that hub. The hub will use a new messaging format that understands all of the old messaging formats, and can use that for transaction processes in some instances. Externally, organizations are already beginning to interface with each other much more effectively than they used to.

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Moving to the marketplace mindset The leadership of internal shared services organizations today is under a tremendous, contradictory pressure: to do more with less. They are continually challenged to reduce costs – and improve customer satisfaction levels at the same time – to remain competitive with outsource service providers. The best-run internal service organizations are coping with these new demands by aligning their service offerings with corporate strategy and placing their internal customers at the centre of their service priorities. In essence, they achieve operating excellence by running what the Gartner Group refers to as an ISCO. The ISCO model balances the forces of supply and demand and market efficiency – thereby enabling the service organization not only to attract internal paying customers with services they really need, but also to optimize internal and external delivery resources and demonstrate the value delivered in a tangible way. Internal service organizations that operate like a business require: ■

insightful customer-oriented service design and cataloguing;

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more aggressive service marketing and simplified ordering;

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rigorous delivery process optimization;

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actionable, closed-loop feedback of knowledge about the service business.

For Peter Moller of Deloitte and Touche, automating shared services is all part of the move to the market, or the networked economy, in which companies focus on what they do best and deliver a quality service to clients. Providing services that people need and are willing to pay for, at a cost, quality and timeliness competitive with alternatives, is the only way to survive – principles that apply to all shared enterprise services, whether or not they are set up as business units in their own right. The advent of software solutions that are specifically designed to effectively manage shared enterprise services is an important trend.

LIGHTS-OUT PROCESSING: VISION OR HALLUCINATION A great deal has been said about ‘lights-out processing’ and how it will shape the future of shared services. Both the concept and the terminology are seductive, but what is it exactly and how will it benefit organizations that use shared services? In essence ‘lights-out’ processing is a ‘nirvana state’, a vision that back offices are aiming towards. It actually means that transaction processing is automated to such an extent that firms can process transactions over night with the lights out. That is to say, human intervention more or less drops out of the picture! There are a number of trends that are at the root of the move towards lights-out processing. Web-enabled service applications are pushing data entry from back

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office transaction processes out to suppliers, customers and employees. Historically, firms would be keying in invoice information and expense claims as they came in. Today, this simply doesn’t happen anymore. For example, if you have a web invoice, an EDI invoice, an XML invoice, or an invoice that needs to be scanned for character recognition, you don’t need to key in supplier invoices when you receive them – everything is automated and comes in digitally. Similarly, if employees are processing their own expense claims and filling in electronic time forms, you don’t need to key that information in again. With self-service applications integration is much improved, both within the organization and between organizations. Within the organization integration is improved – information is only typed in once and from there the technology takes over. Between organizations (and this is where EDI, XML and optical character recognition (OCR) come in) suppliers and customers are inputting orders or invoice information electronically. The back office sits back and allows the transactions to get processed. In reality, however, no one is quite there yet because there are still occasions when EDI invoices that come in don’t match with the orders (either because the quantity is different or the price has changed). Similar problems can arise with XML if everything is automated from the technology perspective but there’s a fundamental error in the price or the fulfilment. It is important to understand that a virtual shared service centre is not one where you have lights-out processing and no people at all. People will still be in charge of analysis in the back office. The aim has always been to get the transaction processes automated and working at low cost, and then do more business partnering and analysis. Some of this analysis can be best performed in the shared services environment where the data is corrected, the information generated and the reporting tools exist. In fact, a fair amount of business analysis and planning can be performed in shared service centres. Moreover, some employees, partners, suppliers or customers will always have trouble getting online effectively. These are the ‘off-liners’. These people will always have to have some kind of specific back office as a support.

CONCLUSION The e-SSC are designed to meet the unique information and transaction processing requirements of the business-to-business and business-to-customer e-commerce environment. Firms building an e-SSC replace existing manual paperbased transaction processing with streamlined e-commerce processes (processing volumes per full-time equivalent staff increase substantially allowing staff in the SSC to focus on higher value added analysis and reporting). Under the e-SSC, existing processes such as the purchase to payments cycle are moved to the web thus eliminating time-consuming manual processes. This move 154

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to web-enabled processes is facilitated by a range of enterprise systems from vendors such as Oracle, SAP and Peoplesoft, who have all made significant investments to ensure their core ERP systems are web compliant. The move towards the e-FSSC is being prompted by the realization among the accounting and management profession that the techniques and approaches of the 1990s will not serve them well in the web-enabled world of the 21st century, where changing business models and the pressure to create shareholder value requires a change in mindset from the stewardship and control role to the value creation perspective. This change has created a need for the e-FSSC director to effectively manage relationships with suppliers, customers, partners and other stakeholders. Increasingly the organizational value chain encompasses a complex world of online business-to-business markets and specialist industry online exchanges fed by a global supply chain. Industry driven e-enabled supply chains already visible in the automotive and chemical sectors are likely to become pervasive by 2005. While these vertical exchanges reduce the complexity of the procurement process, they often add an additional layer of systems complexity as e-FSSCs are faced with integrating their existing ERP system with newer software systems. In some cases firms may be participating in several different procurement exchanges each with their own preferred system platform. Increasingly firms are outsourcing activities and moving non-core support activities to the shared services environment. The e-SSC of the future must build brands and ideas on key activities. By successfully outsourcing and implementing web-enabled technologies, it will positively affect its market capitalization. In the virtual world of the web-enabled shared service centre the core competency will become one of establishing and maintaining relationships based on a reengineered business model. The increasing knowledge content and complexity of the tasks carried out as part of shared services operations force SSC directors to deal with a number of challenges including the following: ■

the building of virtual shared services with integrated supplier, customer and internal systems, where data entry becomes the customer, supplier or employee responsibility, signifies a move to a very different environment (maximum automation and minimal intervention in back office processes);

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IS/IT integration at e-FSSCs will include integration with business-to-business exchanges and markets;

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e-FSSCs will work in creating greater value to added reporting (peer reporting, balanced scorecard measures, etc.), using the web and intranets for distribution;

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the organization and structure of the e-FSSC will serve a diverse range of cultures, stakeholders and customers; it can potentially become the catalyst for cultural change within the organization;

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service expectations, performance measurement and dispute resolution must be agreed upon through formal contracts such as SLAs; accountability remains key for the survival of the shared services organization;

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the extension of the e-FSSC concept will include factory accounting, the processing of e-commerce transactions, e-tax and e-compliance reporting; the e-FSSC will reengineer the business processes and the business model to take advantage of the e-commerce challenge;

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the current FSSC will move towards 24/7 web-enabled financial reporting and towards the convergence of management reporting and shareholder reporting;

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there will be constant challenges from low labour cost locations while building the virtual office;

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a reduction in the number of legal/statutory or legal entities will take place, as well as a move to UK/US GAAP and less local compliance reporting; some level of tax and legal reporting simplification will occur, as well as shorter reporting cycles;

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the adoption of new technologies such as VRS (Voice Recognition Software) and OCR will reduce current dependencies in language skills;

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second wave ERP – new systems will be implemented including ASP, wireless and mobile commerce;

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the adoption of global banking (offering comprehensive cross-border banking services) will allow for greater streamlining of operations, less complexity in the banking processes and reduced banking charges;

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CRM technology employs workflow technology and is set to become increasingly significant.

The challenge for the e-SSC is to create value added through a comparative advantage in information and knowledge-based processes. The shared services organization must become web compliant at all levels and processes and develop a culture of global citizenship where the focus is on managing the complex and changing relationships which make up the value chain. To do this, shared services directors need to develop their change management expertise as well as their systems integration and communications skills. They will need to be much more entrepreneurial and proactive in redesigning the business model.

References Schulman, D. S., Harmer, M. J., Dunleavy, J. R. and Lusk, J. S. (1999) Shared Services: Adding Value to the Business Units. Winchester: John Wiley & Sons.

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10 Future directions

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Trends for the future of SSCs

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Conclusion

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TRENDS FOR THE FUTURE OF SSCs Thought leadership in the field of shared services has in the past concerned itself primarily with identifying ‘hot’ new locations for SSCs. In this section we attempt to bring our own experience and views to the question of the future direction of shared services.

Shared service centres will become a permanent feature on the business landscape Shared services will undoubtedly remain a permanent fixture in the future. The costs are too compelling to ignore for both the private and public sector where CEOs and CFOs are waking up and demanding that their staff adopt a code of permanent and ruthless cost reduction and value creation. A sizeable number of established Fortune 500 firms have yet to embrace shared services and these will undoubtedly do so before 2005. In addition, so-called ‘new economy’ firms which have rapidly grown into global players are already recognizing the role of shared services in delivering the vision for finance and administration in the global networked organization. Relatively new firms such as Siebel systems have gone directly to the SSC model in Europe and have bypassed the controllers in every country model associated with more traditional firms.

The use of business process outsourcing will continue to grow and expand Established SSCs as well as non ‘SSC-ed’ firms are realizing the potential savings from BPO. In particular, the success of firms such as BP in the areas of finance and HR and National Australia Bank in the areas of facilities management have resolved many of the reservations which large firms had about outsourcing. In the future we will see more and more activities outsourced and also more multipartner BPO arrangements. This will involve firms with different skill sets and core competencies coming together to meet the needs of clients. Increasingly firms are outsourcing more than in the past and moving non-core support activities to the shared services environment. If the business of the future resembles something, it is likely to look like the CISCO of today, where the key activities are building brands and ideas. This so-called weightless manufacturer has tried to outsource and webenable as much as possible. In the virtual world of the web-enabled shared service centre the core competency will become one of establishing and maintaining relationships based on a reengineered business model.

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E-centres will become the norm Web-enabled shared service centres are designed to meet the unique information and transaction processing requirements of the business-to-business and businessto-customer e-commerce environment. Under the e-centre concept more firms will replace existing manual paper-based transaction processing with streamlined ecommerce processes where processing volumes per full-time equivalent staff increase by a factor of ten, thus allowing staff in the FSSC to focus on higher value added analysis and reporting. Under the e-centre existing processes such as the purchase to payments cycle are moved to the web, thus eliminating timeconsuming manual processes. This move to e-web-enabled processes is facilitated by an emerging range of enterprise systems from vendors such as Oracle. In addition to e-procurement and e-fulfilment we feel the real growth will be in the areas of e-HR, e-government and e-compliance with such agencies as the Securities and Exchange Commission and Financial Services Authority. Bob Gunn argues that the concept of shared services is now fully evolved and the current S-curve is going to reach maturity soon. The next S-curve is going to be about dot-com-ing the infrastructure and really turning shared services on its head. It puts both the initiation and the value of administrative work back in the hands of the line managers so they can do the administration themselves rather than having somebody else do it for them. It gives them access to information so they can make decisions and it allows them to execute a transaction gracefully. This transition is the next big mountain to climb.

Shared services will be a key part of the finance-to-business model The emerging finance-to-business model places finance in a clear and unambiguous value creation and value protection role. Under this finance is charged with meeting a number of demands: ■

delivering value to shareholders;

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challenging and supporting decision makers in areas ranging from strategy formulation to business execution;

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delivering effective control and risk management;

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providing effective transaction and event processing across the extended value chain from suppliers through to customers and regulators;

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supporting and meeting governance and regulatory requirements.

As Figure 10.1 illustrates, the SSC will play a key role in meeting these requirements by providing the environment in which transactions are processed, controls enforced and information delivered to the point of decision making.

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Fig. 10.1

Finance to business

Relationships management partners, suppliers, customers

24/7 Financial reporting

Web consolidation Site accounting

Business-to-business processing and reporting Finance to business Logistics and fulfilment Supply chain management

Environmental Safeguarding assets legal, insurance, risk

Asset control and security

E-tax and treasury

The reach and range of shared services will continue to grow The number of SSCs will continue to grow as will the demand for accountants with experience of pan-European financial reporting. In addition, these accountants will be expected to address a range of change management issues associated with the move to SSCs. The emergence of e-business and the need to continue to attract work to the SSCs has prompted a number of FSSC managers to expand their activities beyond the traditional accounting areas. In particular, the authors have found evidence of SSCs carrying out the following activities: ■

e-business hubs business-to-business processing;

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environmental compliance reporting;

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health and safety reporting;

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routine legal work including claims processing;

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estate and property management;

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risk assessment and insurance;

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HR systems management;

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shareholder relationship management.

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The Andersen/akris.com shared services survey has revealed that the scope of shared service centres will expand radically to encompass processes like sales and marketing. However, many of these will be outsourced to external suppliers of shared services. The emergence of e-organizations will also have a major impact on how shared services is implemented everywhere. At the same time, the extent to which shared services is operated as a business will need to develop in the future. Today, only 12 per cent of shared services are sold to clients outside the organization, while 88 per cent of shared services are for internal clients alone. As Figure 10.2 illustrates, the European SSC of 2006 is faced with two tasks: extending the range of activities carried out at the SSC and also increasing the number of countries served by the SSC. Fig. 10.2

Extending the reach and range of the SSC

Reach

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Shareholder relationship management

E-business/CRM ■

Environmental reporting ■

HR ■

Property management ■

Legal

Insurance ■

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Fulfilment ■

Localization ■

Pensions ■

Funds administration ■

Records retention ■

Management reporting ■

Payroll

Tax accounting ■

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Treasury ■

Inventory ■

Cash management ■

Invoicing and billing ■

Fixed assets

Accounts receivable ■

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Travel and expenses ■

Consolidation ■

Accounts payable ■

Statutory accounting

Inter-company accounting ■

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General ledger accounting ■

Range

In this setting, with the increasing knowledge content and complexity of the tasks carried out, SSC directors will be faced with a number of challenges including: ■

how to organize and structure an SSC which serves such a diverse range of cultures, stakeholders and customers;

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how to extend the SSC concept to include the processing of e-commerce transactions;

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greater value added reporting on sites including peer reporting balanced score card measures and other types of information;

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web-based distribution of reports and information to sites using intranets;

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reduction in number of legal/statutory or legal entities and move to UK/US GAAP and less local compliance reporting.

Enterprise application integration will continue to be a headache Increasingly the organizational value chain encompasses a complex world of online business-to-business markets and specialist industry online exchanges fed by a global supply chain. These industry-driven e-enabled supply chains are already visible in the automotive and chemical sectors and are likely to become pervasive by 2005. While these vertical exchanges reduce the complexity of the procurement process, they often add an additional layer of systems complexity as SSCs are faced with integrating their existing ERP system with newer software systems such as Commerce One, ARIBA and i2i. In some cases firms may be participating in several different procurement exchanges each with their own preferred system platform. The promise of ERP with single system, single data instance is rapidly being undermined by the business-to-business explosion.

The model is global Bob Gunn, who as one of the ‘fathers’ of shared services has a right to have an opinion on what’s to come, believes that the future model of SSCs is the global model, not even regional. He talks about three regional capacities – Europe, the western hemisphere and Asia. From the customer’s viewpoint it doesn’t matter where the work gets done. At American Express, Hewlett-Packard, Dow and GE, who is doing the work and where it’s being done is irrelevant. It is totally transparent to the customer of the administrative work. Europe is ten years behind in comparison with the USA. The killer is that the whole concept of shared services started in Europe, back in 1981. So the Europeans who say that it can’t be done are wrong – the fact of the matter is that Ford started this in Europe. Five or six years later they were doing cross-border transactions and were not being impeded by the regulatory environment. What impedes things is not the regulatory environment, but internal resistance. With the capital markets going global, the Europeans cannot afford – and they know it – to remain two to three times less efficient in administrative areas than the USA.

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Going virtual is fine in theory but difficult in practice Peter Moller, a leading adviser with Deloitte and Touche, points out that the virtual approach is attractive in theory. ‘With the benefits of a single instance of technology (Oracle or SAP, for example), you have the benefits of standard processes as well as a country-specific understanding of local cultures. You don’t have the disruption of moving, firing or redeploying people. However, just because you put in a single instance of the technology doesn’t necessarily mean that you’ll get standard processes.’ In the past many companies put in SAP across Europe and assumed they would have fantastic standard processes, only to find people are doing things completely differently in each country. A physical shared service centre is the easiest way to get a standard process – and a world-class one at that. There are a number of reasons why going virtual is difficult: ■

technology alone doesn’t drive the process;

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implementation and maintenance of the process is very difficult;

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you can even have poor spans of control in each country, with several payables clerks working under several supervisors in different countries;

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it’s very difficult to introduce a service culture in many different locations – if you leave people where they are, you cannot very easily change their attitudes.

All of these suggest that while virtual shared services has its advantages, it also some very significant disadvantages. Moller argues that ‘unless you can fully automate the lights-out processing, then I consider that physical shared services is still the name of the game. What I’m advising clients to do is follow a two-fold strategy: build your shared service centre and then get rid of it because unless you build it you can’t get the standard processes that you need; unless you build it you can’t get the service culture and you won’t find it as easy to move to lights-out.’

CONCLUSION The challenges of the present demand that those who build shared services in the future do so in ways that are much sharper and more intelligent. Shared services already has real sticking power, and it will continue to work best when companies are poised for explosive growth as an intelligent alternative to growing overheads in a misguided effort to meet demand. The challenge for the e-centre is to create value added through a comparative advantage in information and knowledge-based processes. This will require the SSC to become e-compliant at all levels and processes. In addition the e-centre needs to develop a culture of global citizenship where the focus is on managing the complex and changing relationships that make up the value chain. To do this, SSC

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directors will need to develop their change management expertise as well as their systems integration and communications skills. As such the successful e-centre will require finance professionals to abandon their traditional role as controllers in favour of being much more entrepreneurial and proactive in redesigning the business model. Finally a word of caution! If finance professionals fail to meet the challenge of the emerging finance-to-business world then the worst-case scenario looks rather unappealing. In this accountant’s nightmare the CFO ends up sharing a secretary with the in-house counsel and they have a total of five staff (between them). All the strategic decision support is delivered by two former McKinsey consultants and a former investment banker from Goldman Sachs. Internal audit is provided by a fat-four accounting firm while Munich Re provides risk management. Finally, the former finance director for EMEA now heads up the e-SSC of the BPO firm which provides the firm with transaction processing from a very low-cost but somewhat humid remote location and spends most of the day wondering where it all went wrong!

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