Shared Services: Enterprise Wide Control Environment - Phil Searle
Shared services has been widely recognised for many years as being a very effective way to achieve the triple benefit of lower costs, improved service levels and a tighter, more efficient, enterprise-wide control environment.
Each company or organisation will have different primary motivators for embarking on shared services, but it is usually for one or more of these three main reasons. Successful initiatives can in fact achieve all three.
There are basically three main definitions / descriptions of shared services:
(a) An organisational definition: shared services is the organisation that provides non-core, but "mission critical", services to the business, employing a specialist team, geographically unconstrained, and focusing on the requirements of the customer. This involves a philosophy and approach totally unlike traditional corporate-driven centralisation.
(b) The goal of shared services: to provide high quality, non-core services (which can include both repetitive common processes and more specialised professional services) to the business at lower cost and more efficiently than the business could otherwise provide for itself.
(c) How shared services achieves its goals: shared services achieves cost savings, higher quality of service and a tighter control environment by leveraging economies of scale, technology, organisational realignment, labour arbitrage, best practice and end-to-end process re-engineering.
So shared services is more than just account payable! In fact, the shared services approach can be applied to just about everything that supports the running of a company or organisation. Ultimately, what is it that makes a company or organisation unique? It is the product or service (the 'value offering') that it provides, within the framework of its own unique culture. Everything else can, at least in theory, be 'shared serviced'.
This article aims to cover some of the more significant areas that finance executives might want to consider when embarking on, or moving further down the path of, shared services.
WHAT SHOULD BE INCLUDED IN SCOPE (IN TERMS OF PROCESSES, FUNCTIONS, LOCATIONS, REGIONS AND ENTITIES)?
Many organisations have been able to achieve some of the benefits of shared services by implementing within a limited set of functions or processes. Shared services could potentially encompass all the 'non-core' support functions of finance, HR, IT, legal, procurement, real estate and site services and could also potentially expand into other support functions such as marketing, customer support, distribution and logistics.
As is the case with the number and scope of specific support functions that have come under the shared services umbrella in many organisations, the scope across regions, countries and legal entities has often been limited. There is tremendous opportunity to globalise and expand the scope of shared services across borders and continents and across all legal entities wherever they are domiciled. One also needs to consider how far up the 'value chain' shared services can go, from more traditional transaction based, or 'back office', functions up into more 'professional and technical' services.
Looking ahead, a recent (September 2005) finance and accounting transformation survey by The Shared Services and Business Process Outsourcing Association (SBPOA), in association with HP, shows a trend of continuing migration towards shared services and also to outsourcing. This does not just apply to the more transactional and administrative services but also to more professional and technical areas. For example, tax accounting is projected to rise from 29% of shared services today to 34% within 12 months, and from 8% to 15% for outsourcing. Similarly, strategic planning is set to rise from 13% of shared services to 16% within the next 12 months, and, very interestingly, from 1% to 5% for outsourcing.
UNDERSTAND THE LATEST TECHNOLOGY ENABLERS AVAILABLE TO SHARED SERVICES PRACTITIONERS
Technology has come a long way in the last ten years plus, and even more so in the last three to five years in becoming a real value enabler for shared services (and business process outsourcing).
There are a significant number of technology enablers on the market today, and the technology is ever improving. However, it is important to emphasize that it is very easy to spend multi-millions of dollars on technology and achieve only a very poor result. However, planned, implemented, managed, resourced and communicated well, you can spend a great deal less on technology solutions and earn a very significant return on your investment.
HOW BEST TO STANDARDISE, SIMPLIFY AND, AS FAR AS POSSIBLE, CENTRALISE END-TO-END PROCESSES
Standardisation, simplification and centralising processes can improve service levels and minimise costly 'exceptions', enables automation and also has the significant benefit of tightening an enterprise's internal control environment through clearly defined, controlled and documented processes, testing and training and through improving visibility and ensuring that policies and procedures are followed in the same way across the enterprise.
The best shared-service operations employ full time business process experts. Certain companies have also employed techniques such as Six Sigma to embed continual process re-engineering into an enterprise's culture and have full time 'Six Sigma Black Belts' in high profile positions in the company. Some companies have also actively encouraged change and reengineering by offering monetary incentives to those who come up with value adding ideas that are then successfully implemented in practice.
HOW TO ORGANISATIONALLY REALIGN TO SUPPORT SHARED SERVICES
Bringing the provision of as many of the non-core services as possible under one organisational umbrella allows the generation of a new mindset and the offering of end-to-end services rather than specific task based services (e.g. order-to-cash, procure-to-pay, hire-to-retire, data capture-to-reporting, rather than specifically order administration, credit, collections, accounts payable, payroll, benefits, general ledger, corporate reporting, etc).
Organisational realignment has the benefit of removing silos and knocking down barriers to change and can help foster a strong shared service culture and team spirit. Centralising and consolidating this way also allows an organisation to leverage economies of scale, succession planning, job rotation, and to run targeted and consistent training programmes, all of which can all increase productivity and lower costs.
WHERE TO LOCATE OPERATIONS AND HOW BEST TO POTENTIALLY BENEFIT FROM LABOR COST ARBITRAGE THROUGH LOWER COST LOCATIONS
There can also be significant value gained from moving to centralised shared service centre locations as this can still result in economies of scale, better leverage and reduced cost of labour (through 'off-shoring' to lower cost locations).
Research has found that companies can save over $30,000 per person per annum in labour costs by moving from an existing Western location to an offshore location such as India or the Philippines. However, the 'hidden costs' can be significant.
Companies can spend between $8,000 and $12,000 per seat for additional facilities, telecommunications and technology infrastructure. Add these to costs such as redundancy, lease termination, and internal project costs in determining your return on investment. (Source: EquaTerra article in December 2003 issue of Shared Services News).
Remember though that it is always better to eliminate work rather than re-locate it, for example through reducing non-value add activity using tools such as Activity Based Costing (ABC) and Six Sigma, and through standardisation, automation and streamlining of processes, etc.
OUTSOURCING AS A POSSIBLE ALTERNATIVE TO, OR EXTENSION OF, INTERNAL SHARED SERVICES
In theory any 'non-core' service can be considered for outsourcing. The question is really one of cost (short and longer term, fixed and variable) versus control. The 'attitude' to outsourcing also depends on other factors as well such as company culture, risk sensitivity and the level of development and maturity of any existing shared service functions. Outsourcing can also sometimes be used as a 'lever for rapid change'.
Generally, transaction based services are easier to outsource than services further up the value chain. Having said this, in line with the experience of internal shared services, the trend to outsourcing will continue to develop and mature, including offering more services further up the value chain.
HOW TO GO ABOUT ACTUALLY IMPLEMENTING THE INITIATIVE AND AVOID SOME OF THE POTENTIAL PITFALLS
Of course, not every implementation is a success. So what are some of the keys to success that have been used by best-in-class proponents of shared services?
Senior level executive sponsorship is critical. Make sure that key executives understand and support the rollout.
It is really important to distinguish between 'solutions' as opposed to 'quick fixes'. The desire to keep pace with the possibilities has meant that some organisations now 'jump the gun' and don't think things through properly and completely.
Understanding your company or organisation's culture is critical to understanding the 'framework' and boundaries within which shared services can be implemented in an organisation.
Proper base-lining and an ear business case is key. Budgets need to be set and managed to. It is easy to spend multi-millions on a poor initiative if things get out of control, but is also entirely possible to spend much less and get a much better result.
Do not underestimate the change management required for any such initiative. Shared services initiatives cause, and require, significant change affecting people, processes and organisations.
Assign your best resources and people to the project. Remember this is a significant investment and its success will be 'mission critical' to the success of your organisation, so make sure you give it the best chance of success.
Follow what I call the '80/20 rule for shared services ERP' when deciding whether to use 'vanilla' ERP functionality. If your core ERP can provide you with 80% of the functionality that you require as standard then you should go with this every time. The remaining 20% will either have to be foregone or internal processes adapted to meet the standard functionality offered.
Engage targeted expert outside help. Neither abdicate responsibility for the project to a third party consulting firm nor try to do the whole thing 'on the cheap'. A partnership approach with relevant and expert outside help is the best way to proceed.
Remember always that the project does not end with 'go live'. There needs to be adequate support post go-live and also continual training and re-training.
Keep working towards your goals and be relentless in pursuit of them. Shared services initiatives are a significant commitment both in terms of resources and energy, but can add real and significant long-term value.
In today's demanding, fast-paced economy, business leaders face growing pressures on many fronts as well as being presented with many new possibilities. As a result, there is much greater pressure and opportunity to reduce costs and increase efficiencies, especially in the non-core, but 'mission critical' business support areas.
There is also much greater focus on internal control and the integrity of reporting. Furthermore, senior management and investors are demanding profitability and return on investment, often with shorter paybacks.
Implementing shared services is a major change initiative that can really derive significant business benefits in terms of reduced costs, better services, improved quality, speed and accuracy of data and a tighter and more efficient enterprise-wide control environment.
This article has hopefully provided some useful guidance on some of the best practices in shared services. Each company or organisation should adapt the approach to be taken to its own particular circumstances, culture, attitudes to risk and overall goals.