The strategic question
Since the early 1990s, shared services have been seen as a key vehicle for transforming back office support activities. Over the last fifteen years over 75% of FTSE 100 companies and numerous other national and multinational organisations have moved to this model. Both tangible and intangible business drivers have influenced the decision to pursue Shared Services and organizations have not just looked for cost savings through headcount reductions but also focused on process improvement

Many shared services organizations, however, are failing to meet their full potential. In many instances this is due to a: In the last two years, the need to establish globally integrated and transparent financial management systems quickly has increased considerably.

• Lack of a mandate from senior management to drive standardisation, migration and compliance;
  
• Lack of steadfastness to truly transform processes and systems; and a
  
• Lack of commitment to re-allocate resources.
  

So, although management may have “ticked the box” by setting up a shared services organisation, the discipline of SSCs has come of age and perhaps it’s time to ask the question “Are we extracting the full potential from our shared services set-up?”

This article invites management to challenge its current SSC status by asking four fundamental questions:

1. Have we optimised the processes so as to maximise efficiency?
2. Is there the potential to increase scope of the SSC?
3. Is our SSC in the right location?
4. What is the optimum sourcing model for our business?

1. Have we optimized the processes so as to maximize efficiency?
As the figure below illustrates, Optimisation is one of the strategies that organizations are pursuing to re-vitalise their shared service organizations.



Optimisation requires close examination of all aspects of shared service operations from process automation and standardisation to performance management, from organisation structure and governance model to Service Level Agreements (SLAs) and charging models.

• Automation: The advances in enabling technologies such as workflow, scanning & OCR, and eInvoicing, to name but a few, and the elimination of exception processing caused by non compliance, are enabling organizations to achieve straight through transaction processing (i.e. without manual intervention).
  
  
• Performance management framework: Metrics that measure both cost and quality of service are also essential to move a shared service operation to the next level. They are required to ensure that management takes responsibility for their functions and for driving continuous improvement. This is an area that in general has had limited focus in the past.
  
  
• SLAs can also be an effective management tool but many organisations have had mixed success because SLAs are sometimes thought to be cumbersome, poorly developed and lack buy in from key stakeholders.
  
  
• Governance structures that encourage dialogue between the shared service and its customers have proved effective in ensuring that performance targets are appropriately set, aligned to business objectives and effectively managed. They also ensure effective change control which helps maintain and encouraging standardisation.
  
  
• Charging models should provide clear accountability and some level of transparency of the services provided. The mechanisms for charging back the cost of the SSC are varied. They range from a simple cost allocation on the basis of specific business unit characteristics (e.g. revenue) to complex activity based costing models that charge back the service provided on the basis of cost drivers.

2. Is there potential to increase the scope of the SSC?
Although transaction based activities have traditionally been the main targets for shared services the scope has widened significantly with decision making support activities and specialist services now being included.

As shared services have evolved, they have been moving up the value chain. They are moving from being transaction processing factories (AP, AR, GA, T&E etc.) through centres of expertise (e.g. providing services such as tax planning, treasury services, internal audit etc.) to being business partners and corporate stewards.

At this advanced level, they are providing decision support services such as business performance analysis, cost analysis and strategic planning support.

The potential for change is illustrated below:



3. Is our SSC in the right location?
Moving operations to near-shore or offshore low cost locations can open up significant cost reduction opportunities through wage arbitrage whilst also giving access to the specialist talents of particular economies in delivering specific service offerings.

Technology and telecommunication advancements have opened up a wide new world of possible locations. Near shore locations such as Eastern Europe are developing rapidly as centers where European language is important in the processes, and the offshore possibilities are vast, from India to South East Asia to China. There are many factors that influence the location choice: availability of skilled labour, wage cost, economic, infrastructure, political stability, tax benefits and government subsidies to name but a few.

4. What is the optimum sourcing model for our organization?
A number of models have emerged ranging from Captive shared services (owner operated near or off-shore facility) to Outsourced (Near / off-shore services provided by third party Service Providers) with several hybrid models including BOT (Build, operate Transfer) and Joint Venture.

Captive Shared Services
Organisations with particular concerns about Control and the safeguarding of Intellectual Property, or aiming to maximize savings, tend to favour a Captive shared services model. Although the lead time to set up a Captive operation is longer and the capital investment is greater than outsourcing, more than 300 North American and European companies have started their own near or offshore setup since 2005.

However, setting up of a captive shared service is not for the faint hearted. A recent report by Forrester, suggests that over 60% of Captives fail to achieve their full potential. There are several reasons cited for this:

• Sporadic management support: Management enthusiasm for off-shoring is short lived which hinders the captive center’s ability to gain scale and internal momentum
  
  
• High set up costs: Forrester Research showed that captives spend more on salaries because they hire more senior staff, spend lavishly on buildings and furnishings, and end up spending much more on headhunting fees to compensate for attrition.
  
  
• High Attrition and increasing wage costs: Like others in the industry, captives too are facing problems of attrition, rising wage costs etc. Captives cannot offer the broader experience, international travel, and clear career paths offered by third-party providers, resulting in a higher attrition than third party service providers.
  
  
• Lack of process improvement and systems integration: Processes designed to work within the four walls of the company buckle when deployed at a global level. Captives, tend to lack a continuous improvement culture, do not invest enough in process improvement measures such as six sigma, or security certifications.

(Source: Forester “ Shattering the Offshore Captive Myth” Sudhin Apte, Apr 2007)

Outsource
Outsourcing has become an accepted strategy over recent years. It provides the most rapid speed to market for relatively low capital investment. Outsourcing also has the added advantage of increasing focus on back office processes. This is because what is Back office for the client becomes Front office for the Service Provider so there is good focus and better transparency. However, outsourcing comes at a cost as service providers take a cut of the saving as their profit margin.

With more capable service providers on the market, the number of F&A BPO engagements being signed has shown a rapid rate of increase. Companies have more choices in the functions that they outsource and the operating model that they adopt. Outsourcing models are numerous and there are many decisions to be made when it comes to deploying an outsourced solution, e.g. Sole supplier vs Multi-source; Global vs Regional vs Local; ‘As-is’ process ‘lift and shift’ vs ‘’fix and shift’; Phased Transition vs Big Bang.

Conclusion
So how do you get started?

As ever you can adopt one of several approaches.

• Benchmarking yourself against other leading organizations is always a good place to start as it gives you a good feel for the size of the prize if you can move to the upper quartile. This will also enable you to identify the key areas that need specifc focus and form the basis for prioritization of an action plan
  
  
• If you do not have the data to be able to conduct a comprehensive benchmarking study. Do not worry, all is not lost. A self assessment of the various aspects of your operation against a maturity model is another way of gauging your effectiveness. In essence you look at the characteristics of an organization at various stages on a maturity conitinuum and assess which stage best reflects your own organization (see illustration below). As with benchmarking, this also enables you to identify and prioritise the areas for development.

There are big prizes to be won but there are also many pitfalls. Traveling along the shared services journey is a challenge as there are many options to choose from and many decisions to be made. But, can you afford to stand still? Isn’t it time you got started now?

For information on how Alsbridge plc could get you started on the optimization journey, contact:

Elaine Harrison
elaine.harrison@alsbridge.eu;
+44 7887 825 982