Captive Shared Services – What does the future hold? Part III

SSON News and Analysis
Posted: 07/09/2012

The following is the third part of a session Ian McAtamney led at SSON’s Shared Services Summit that ran in February, 2009 in London

Ian McAtamney: However there is always bad news. There is a disadvantage with some captives in that managing attrition you invariably have to pay higher wages than the BPO’s. The wages that you pay will depend on how strong your brand is in these locations and the ability to attract talent depends to an extent on how much branding or advertising you are doing.

Even though Reuters has a pretty good brand worldwide, I found that when we were recruiting Tesco’s was building an offshore centre in Bangalore at the same time. Now Tesco’s isn’t very well known in India, but what they did do was to plaster the city with giant billboards advertising their recruitment drive.We were finding that people coming to our company were accepting the jobs and then not taking up the jobs and suddenly disappearing to Tesco’s. We looked into this and found out that their reasons were that it must be a better company because they have bigger adverts. You need to look at how you brand your company if you want to keep your attrition low.

With a captive you clearly haven’t got the scale of a BPO so we were constantly fighting the disadvantage of operating from a single geography, particularly in an area like Bangalore where it really is a hotbed and is probably maxed out or close to maxed out in terms of its capacity for high level skills. We found it quite hard to find qualified staff. BPOs have now diversified their geographical footprint. A lot of them are now moving to the near shore market or expanding to China or other areas. So that’s a big advantage that they have over a company that has gone captive. To give an example there, when we first created our centre in 2004 and hired the senior management level team, it took us about two weeks to hire the top two tiers of management. Towards the end of 2007 it could take up to three months just to hire an AP clerk. That’s the sort of disadvantage that we were finding and how quickly it turned around.

I mentioned the issue around technology where you are always going to find keeping technology up to speed difficult, particularly when you make the investment decisions. Also, after a captive has been operating for a few years you find that the focus starts being lost. So you need to find ways of keeping the focus within the staff, and giving them new challenges and keeping the focus on productivity.

On to attrition. This shows the attrition we actually faced in an offshore location. Our attrition for the first year and a half averaged at around 11%, so very low. A lot of that was down to the way that we introduced staff into the company because it will either happen in the first 3 months or after the first two years. The big problem in creating a brand new captive is that you hire all of your staff within a short timeframe and these staff, as someone said earlier, look to move job or get a promotion within a one and a half to two year timeframe. What we found was that this then made our attrition rocket around the two year timeframe as all the staff had gone through the same length of service and were all looking for promotion. And that becomes very hard to manage; it peaked to about 34%, and to me that was unsustainable because it takes out too much of the management bandwidth in dealing with hiring staff and keeping staff in place. A much more manageable level is around 23%. If I looked now it would probably be even lower than that because now the recruitment has been spread out, you have lost that big bubble, that big hump after two years. If you are going captive and you are going offshore be very aware that you are going to see this effect happening.

Anon: Is that basically saying that the peak that you can see there in September/December 2006 was as a result of your time in the market, rather than the market that you are in? So that is kind of the length of time where people start to leave the organisation rather than during that period there was a peak period of turnover in the market.

Ian McAtamney: Absolutely, it’s definitely to do with the timing. One of the key things is that if you are going to go to an offshore location, and you’re going to do it yourself, then hire a local management team because they will understand the culture. They will understand what they need to do to keep your attrition low, and I will touch on that on the next slide here.

As I said, the challenges are after two years. Another driver for keeping the attrition low is how you bring staff in and what your induction is like. A typical onshore shared services model will typically have four or five layers of management from your global head or the regional head. You will then have your service delivery leaders or your disbursements leader or team leaders and your staff underneath. In India you need a minimum of about eleven levels from top to bottom so at least you can keep giving people promotions year after year.

Because we had a local management team, they actually put some really good initiatives in to help the attrition side, all of which were branded, such as ‘fun at work’, ‘people practices’ and things like that, and they put a lot of effort in dealing with the staff. Some of the staff really enjoyed working for the company. The ‘fun at work’ seemed designed to maximise the embarrassment of any visiting overseas staff coming to India. They liked to make us dress up in silly things for the day and other things like that. What they also used to do once a month was have the whole team to go away and have fun.

After I moved everything out to India the question that I kept being asked was "what next?" A lot of people were saying "well if you’ve got a captive, you’ve made it successful; the next step is to outsource it all, right?" My reply to them was always why would I want to do that because it’s going to be much more expensive? If I’ve got a successfully running captive centre, why would I want to outsource that and for pay for someone else’s profit margin?

But saying that, we did actually consider outsourcing and found it wasn’t worth just outsourcing the captive centre but instead we had to look at the much bigger picture. This meant looking at outsourcing the whole finance function across the world and bringing in other functions such as HR to make it beneficial or interesting to the outsourcer. If they just looked at the offshore captive centre, they would never be able to compete with what we could do internally ourselves.

We could have also gone multifunctional. At that moment in time in India we were predominantly financed based but there was always the opportunity to do shared services for the HR piece. However, for various reasons that wouldn’t work in Reuters. What I found in the company was that the way in which we approached offshoring and service centres, each function looked after its own piece and didn’t really co-operate. I always found that there is a general distrust between the HR function and the finance function, particularly because the finance function got there first, the HR function didn’t trust that the finance function will look after it’s interests properly and things like that.

One of the other things that we looked at was divesting the organisation because it was fully global and almost self contained. It is very easy to parcel it up and to sell it on and this way you realise the amount of investment we put into it. It also overcomes some of the other issues like giving a bigger better career path for staff and allowing the scope of the services to grow, so it is actually quite an interesting route to go. We actually did talk to a few companies about going down this sort of route but something happened to stop that which I’ll come on to in a second.

The problem with Reuters was that because it started as a finance function, the management was clearly going to be finance orientated in terms of running the shared service centre, and that was one of the reasons why the HR function didn’t really want to participate because the centre’s management was finance based. Did you feel that you had to overcome those sorts of issues?

Ian McAtamney: I would be interested to know has anyone considered going down or has gone down the divest route in their captive service centres? Has anyone gone from a single stream shared service centre to a multi functional service centre? I know we have got some multi functional service centres here, so I expect some hands to be raised. So did it start off like a finance centre and then you convinced the other functions to join, how did you grow the multi functional aspect?...I’d be interested to hear from some of the single stream service centres, whether HR or finance and how they see their future and in what sort of direction they are going to be growing. And why they don’t see it going down the multi functional route, so since everyone said that they’re not considering this I would expect that everyone else should be able to answer this question.

Anon: I am from the HR shared service centre. We run various HR transactional streams, from payroll right through to administration and I think the first part was getting the expertise, the metrics and the functioning right, payroll has been with us from the beginning. We are run separately from group HR and business unit HR, so it’s that triangle model. I think that we could possibly maybe expand in the future, but currently it is with a focus at being good at HR transactions and also to help our international and our Africa business, to standardise and be good at HR processing.

Ian McAtamney: What does your finance function do, how are they organised?

Anon: We have got a financial shared service centre which basically runs the financial aspects that the pure financial shared services here run, we have got a supply chain shared services centre, and an IT shared services centre. But who knows maybe there will be some consolidation. But I found with us that it is very much specialist areas and they don’t tend to mix. Also Standard Bank is very old, change takes longer, they like a formula that works, and when it works they stick to it, which works well for us in terms of risk reduction.

Ian McAtamney: Very similar to my experience as well. In the end we didn’t follow any of these options because Reuters was taken over by Thomson’s, now known as Thomson Reuters. They already had a centre in Hyderabad so this solved the geographical problem as it allowed us to split our activities across two sites. It also helped the company down the multi functional route as Thomson’s had pretty much completed the HR service centre, and we had a very strong finance centre so it was a perfect marriage to leverage both operations for the whole company. Also on the technology side, the merger was used this opportunity to move everything across to SAP and refreshed technology across the board. And now because of the size of the company, now it’s actually quite a strong operation and quite sustainable.

I want to touch on some of the future ideas for captives. When you look at sourcing your shared service centre needs, there are three things that you should be looking at; it’s the capability, your capacity and your cost. In terms of capability, this is looking at how the services will fit to your business objectives and how it will support the company strategy. You’re looking at people that can support that sort of area. Clearly capacity is important. They have got to be scalable, resilient and have sources of talent when you are choosing your sourcing options. And it’s not only the staff side, you need to look at the infrastructure side as well to allow your business goals to be achieved and clearly cost is also a big issue, you want big improvements and sustainable improvements in your cost profile for your operations.

When you look at where the decision process sits today, most decisions are oriented around the cost side where cost is king. They tend to look at near term cost attributes with a bigger emphasis on getting the skilled resources in place. The analysis is mostly effort driven rather than productivity driven.
What I am seeing now is people moving to bundling services and going to the best of breed of suppliers rather than going for the best cost play which is sort of leading to a change in the way that the sourcing decision is being made. Capabilities are coming much more to the fore, with a much more balanced emphasis across the board where now you want the captive to better support your strategic objectives of the company.

When you look at a value-add versus cost efficiency, most captives, and arguably most BPO providers, are sitting down in that bottom corner. I don’t believe that sort of area is sustainable for the long term future.
There are some decisions to be made, either going up the efficiency route or going up through the value added route and creating a multi functional super captive. If they are going the efficiency route or the factory type approach, the focus is very much on decreasing your costs and being highly measured. If you go the value route then you’re looking at how your can centre better support your company objectives.

Looking at the companies in India, if they are going for the factory route I can tell you now that they are going to lose the race. When I was in China -  I was fortunate enough to be invited out there by the government -  I looked around some of their centres. They take the concept level of factory to a level that I have never seen anywhere else or couldn’t even comprehend anywhere else. They really do operate like a factory, rows and rows of benches and PCs, total silence with people just keying away at manic speeds. You watch the screens of these people just doing invoice processing; the speed that they are transcribing onto the system is at lightning speed. It was basically ten times the productivity of anything I have seen in India, and with almost 100% error free activity. The reason that they can do error free is that every invoice is entered by two different people, so it’s automatically matching up and eliminating errors that way. So when I saw that, it was clear that the factory approach  is not the way to go for the Indian BPO. Instead, they need to drive to be best in class or look at how they can better support the value add side.

In terms of what to focus on if you’re a captive and you want to go through down the value route, you may still keep your management teams onshore but would try to build deep business knowledge and expertise within your organisation. Nearly everything the service centre should be doing therefore should be supporting enterprise initiatives. I know in Reuters we had a big push in working capital. That was driven by and led from the service centre in India rather than anywhere else because they had the global footprint, they had the data and they had the ability to influence the operations across the company. You need to then start creating global career paths for your staff, if you’re an India based employee then maybe your next job will be somewhere in the organisation overseas. You need to cultivate being the employer of choice so you need to brand your company as a good place to work.

If you are going for the efficiency route then you are going to be encouraging a big culture of thrift, keeping things as cheap as possible. Be incredibly strong on your KPI’s, your internal measurements, your systems and your controls. You have got to be automating as much as possible, and making your processes as mature as possible. In this case you are making sure that you have the right skills in place at the right locations where you need them.
You’ve heard of O2C, P2P and R2R amongst other acronyms, this is a new one, I2I, India to India sourcing. This is moving towards a hybrid model where the captive unit starts to pass out commoditised work to the best players in its own market. It means that the skill sets in the captives change to be more around programme and vendor management and because they have got the culture and knowledge around the industry they can manage these relationships a lot better than you could do from overseas.

Some of the benefits I can see for companies that go down this route is that they’ve got better access to entry level resources which allows them to deploy new services a lot quicker. Because they have got a much more flexible sourcing model, it allows the company as a whole hold to leverage the offshore market a lot better than they have done in the past.

 

 

 

SSON News and Analysis
Posted: 07/09/2012

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