KPMG: Set the Standard - Jochen Pampel
Jochen Pampel, head of financial management for Europe at KPMG explains that, before embarking on reorganisation, companies must understand why they need to adopt a shared service centre and what returns to expect.
The payback from effective shared service centre implementation can be as much as 40%, according to Jochen Pampel, head of financial management for Europe at KPMG, certainly for a business in which processes are not sufficiently well organised, where the potential of existing IT is not being exploited fully and where activities and personnel are widely scattered.
‘Behind the shared service model stand two very basic ideas,’ he says. ‘The obvious one is to centralise resources to get economies of scale. But, there is also the second issue, of standardisation. Standardisation is necessary for effective automation and, once implemented, offers truly effective measurement of processes. This, in turn, allows a business to see where improvements can be made, so that a shared service centre can always move forward to be a state-of-the-art service provider.’
KEEP THE BROADER VIEW
Pampel counsels that, while CFOs should rightly be looking to cost reductions, they also need to keep hold of the broader view that the shared service centre is a vehicle for efficiency enhancement. The standardisation and harmonisation of transactions can bring down working capital needs in a way that conglomerates operating with different payment methods might not be able to achieve.
‘It is obvious that how fast you can produce an invoice will have an impact on working capital,’ says Pampel, ‘It is easier to establish a cash collection system in a shared service environment than in ten different order-to-cash points in different parts of the firm. At KPMG we have seen big clients, in transport for instance, who, having established shared service processes that are usually faster and more stable, have had enormous opportunities to improve their working capital matrix.’
When companies centralise finance function processes in internal shared service centres, the drive for enhanced efficiency, based on measurable performance, can be a continuous process which staff themselves are encouraged to drive. The company also has the comfort that they remain in control of the process.
Outsourcing shared service centres presents a different challenge, says Pampel. Outsource suppliers will tool-up to meet a service level agreement which may include incremental improvements over time, but will probably have no major incentive to go any further than their contractual obligations.
After the essential due diligence to establish where a potential outsourcer stands in the market and what its own business plan is, the client must reconfigure management so that an outsource centre will be monitored carefully. It is crucial to ensure that they are delivering and that a strong relationship is built up with the supplier, to allow service level changes to be implemented smoothly.
‘You need to invest some resources in the relationship. It is a partnership which should produce a win-win situation. It also needs to be flexible so that the shared service outsourcer can grow with a client’s strategy. I also have a deep personal belief that quality and efficiency are not contradictory. By focusing on standardised transactions, you create processes that are stable and reproducible.’
It is also clear that companies that outsource financial processes need to keep the knowledge of the processes inhouse.
‘If, at any point in the future, you do not have any idea of what a process should look like, you can only go to the market and ask if someone can do it cheaper or better. You can only work together with the outsourcer when you know something about the processes.’
In terms of total cost of ownership, it is Pampel’s view that what a business does to its processes in-house has to be relevant to what is done by the shared service centre and vice versa.
‘If you want to change processes for the sake of optimising a shared service centre, then it will probably impact on service quality,’ he says.
According to Pampel, changing outsourcers can still be a major management challenge, even though there is now a growing pool of competent alternatives and, thanks to technology, outsourcing is moving towards becoming a commodity.
Unlike the US and the UK, continental European companies have approached outsourcing part of their finance function with more caution.
‘In Western Europe at least, you rarely find firms that have moved their activities so radically into outsourcing that they could not take them back, albeit of course with a lot of effort.’
However, given the huge outsourcing capacity, the competition for business is growing and the offers are becoming more attractive. The convergence of technology platforms will, believes Pampel, remove more of the risk and give clients greater bargaining power.
He adds, ‘There is always something like a lifecycle in the relationship between companies and every one of their suppliers and this is equally true of outsource providers. You cannot be totally sure that the outsource supplier you have chosen is the right partner for ever, so you have to anticipate that the day may come when you will need to change. This possibility cannot be ignored.’
The key consideration, explains Pampel, is to get the planning and processes right before passing them to a shared service centre, be it internal or outsourced.
‘First of all, you need to go through all the processes and define the optimum. Conglomerates will often have a variety of different systems,' he says.
Pampel adds that there is an argument that it is often better to optimise local systems on the new model before they are relocated to a shared service centre, so that they are all joined together into a single running system that works well.
‘However, quite often, for political reasons, that’s not really possible, in part because it would require too much change before there are any benefits. At KPMG, I’ve seen very successful European conglomerates that have taken a process like book-keeping and said that they do not want to be bothered with on-going, tedious, time-consuming change processes. So, they put it straight into a shared service centre, where the potential of further improvments and cost reductions – by harmonising and standardising the systems – is the task of the management of the shared service centre, in alignment with their new customers in the business.’
The drawback here, says Pampel, is that the shared service provider, especially if it is an outsourced supplier, having designed specific processes using specific technology, may not wish to be bothered by other requirements or will not make improvements that will lead to further benefits from the shared service centre.
KPMG has done a considerable amount of work with a wide range clients looking at moving to shared service centre processes, the majority of them in the finance function. It conducts initial analyses and then designs and implements the changes. It has also been involved in improving existing shared service structures that have not delivered their business plans.
'Our general approach is driven by objectivity,’ explains Pampel, ‘because we are not in the business of offering general outsourcing. This helps us to be neutral, whether the option is for an internal or an outsourced solution. Nor do we favour any specific location. To support our clients, we will follow them to any location to find the optimal solution.’