Captive Shared Services – What does the future hold? Part 1

SSON News and Analysis
Posted: 07/09/2012

Captive Shared Services – What does the future hold? Part 1

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

Ian McAtamney: This session is called ‘Captive Shared Services what does the future hold’ and is very much reliant on your participation. If you’re here expecting me to tell you what the future holds then you are going to be sadly disappointed, I am actually here to learn from you. I want to hear people’s own stories around running captives, going outsourcing and hybrid models they’re operating and share their stories with everyone else.
I am going to talk quickly about what is captive, what my own experience is of captives, some of the challenges ahead for captives, as well as some of the third parties. A look at what some of the options are for the future.
I did a presentation two or three years ago on captives and BPO and at the end I had this nice Dutch guy come up to me and ask what I meant by captives and BPO. And that was at the end of the talk, so I thought I had better explain these things up front so there’s no misunderstanding.

In terms of captive, although all in house shared services can be considered captive, in this case I am going to refer to it as captive offshore. These are basically global centres set up by companies with up front investment in an offshore geography. This way they are maintaining full control in the governance, management, and they are usually going for the lowest operational cost based on the scale, and they define their own quality standards.
And normally if they are going down this route they will have their own long term growth plan for the centre or investment in that location and they will be using their own staff.

BPO is really just outsourcing which involves contracting of operations and responsibilities of a specific business function to a third party service provider. The provider will be typically responsible for the process management people, and in a lot of cases the software used; when you go down that route there is a degree of transferable risk to the provider, and that is one of the key differences between the two.

There are lots of other acronyms being banded around, you’ll hear of BOTS, KPOs Hybrids, ASP’s, ITOs, they are all pretty much the same. A BOT is a build operate transfer, it is really an extension of the managed offshore centre where someone will build a centre in an offshore location for your company, but you’ll eventually take ownership after it has been established and operated successfully.

ITO is the outsourcing of your IT operations, KPO is knowledge process outsourcing and is really the high value-add activity being outsourced or specialist activities, and application service providers, really they just provide you web based tools and things like that, so they deliver the software platform which you run your own functions on.

Now for the first time this year the Shared Services and Outsourcing Network carried out a survey, hopefully some of you would have participated in that, it’s the first one so we will being doing it year after year, so we should start seeing trends be established. It makes for quite interesting reading, I would recommend that to you, go to the SSON website and download it.

So I pulled some data out of that on the outsourcing side, and what it showed was that there is still a large portion of people that are still running captive shared services or hybrids. There is still a very small percentage of the market being fully outsourced. The top five finance processes are all the very typical high transaction oriented types of processes, from accounts payable to expenses, general accounting and collections, and payroll. Similar on the HR side nothing really surprising there, pension, benefit administration, call centre management, compensation admin and managing ex pat and payrolls.

I would be interested to see what people do here, so if everyone can stand up. So, everyone up...ok, so can those who aren’t involved in shared services or don’t have a shared service centre today, sit down. Great, not too many. Those who are fully captive, who describe themselves as fully captive sit down. So that’s about two thirds.

Those who are fully outsourced sit down, so it’s a very small number - supports the 9%. Now that’s interesting, those left standing there must be running some sort of hybrid model, although 47% of the survey respondents say that they run a hybrid model, so we need to look into that a bit more.
This is the interesting bit, those that are still standing must be running a hybrid model – can those still standing describe the hybrid model they are operating, and what sort of services are kept in-house, and what are kept out-house. So if you can introduce yourself and just tell us a little bit about your operation.

Annelize Roberts, GSK: In GSK, we have parts like AP, which is fully outsourced. In my department we are doing a hybrid where we say we are moving doing transactional processing out to a third party outsourcer. We are keeping management and control with things like SarbOx testing, the final management reporting and dealing with the auditors in the UK. Then we have the shared service captive, which is my counterpart trading partner in Ireland. Doing VAT in particular is a difficult one we have, that is difficult to give to an outsourcer. Inter- Company profit management, because companies are very involved in that at GSK and toll manufacturing accounting again which is very GSK orientated in house.

Ian McAtamney: That is very interesting, especially the comment on VAT. For me that is actually one of the prime candidates to outsource.

Annelize Roberts: Until you try to find someone who knows all the European markets….

Nigel Coffey, Pfizer: We operate a model similar to Glaxo, a shared service centre based in Dublin, keeping all of the key controls, all of the GL activities still in Dublin. What we have outsourced to BPO is pretty much most of AP, ninety percent of AP. We have had 20% of AR on the non strategic customers, intercompany fixed assets and any transactional activity we can do we’re probably starting now for the first time to push some recs out to the BPO provider.

Ian McAtamney: Which recs, the balance sheet…?

Nigel Coffey: AR to GL and the bank recs as well as the balance sheet recs.

Ian McAtamney: Both of you two are pure finance shared services? You’re multi functional as well?

Nigel Coffey: We are pure finance.

Anon: I am also from Glaxo Smith Kline, shared financial services, a different part from Annelize.

Ian McAtamney: So can you contradict her?

Anon: Not really, we work in different areas so we are close to being fully outsourced, but just not quite, we have retained some elements of payroll, anything to some elements to do with customer relationship management and the ultimate ownership of the processes.

So there’s a retained team in GSK headquarters of about 20 people, rather than outsourcing everything, it used to be a team fully based in the UK before it was outsourced, about 200 people now it’s about 160 in India, about 22 in the UK to cover those bits and pieces that we like to hang onto.

Robert Divall, Lloyds Banking Group: We are a three week old company, formed from the acquisition of Lloyds TSB and HBOS, so 140,000 people, an HR operation which is split down two legacies, of on one side 80% outsourced, on the other side 80% in sourced, so it’s integrating payroll, integrating pension, integrating resourcing, and the key drivers of what has been outsourced and in sourced is dependent on the legacies of the organisation. So, we’re a complete hybrid model in its classic sense...

Ian McAtamney: So unless everyone has lied on their survey, one of the things that I am struggling with is why so few of you remain standing, when by far the biggest percentage is operating hybrid. So does anyone think that they have got an answer for that, or did everyone just want to sit down very quickly? Any takers for that, no?
When the question that was asked, ‘Do people see the level of outsourcing increasing over the near term future?’ over 50% expected the number of processes they are going to be outsourced to increase. One in ten said they would expect it to decrease, and about forty percent said that they were going to try to maintain it at the current levels, i.e. keep the operation stable.

When you look at the different strands, on the finance side there is definitely a big push to outsource, and I think it’s normally because it’s the most mature part of the shared services and outsourcing part of the market. Remaining pretty constant for HR and within just shared services not necessarily outsourcing, but IT and procurement services are more commonly being run from the shared services centre these days
What I find interesting about this survey is that year on year, and if you look at the Hackett stats, everyone always reports that there is going to be an increase in outsourcing, but when you look at the market split on a year on year basis, the BPO part never seems to grow.

And this is the point, so either everyone lies or is over optimistic, or is poor in execution, or they think that they can do things but the investment is never there.
This has been going on for the last ten years, it has always been fixed at these percentages. Now those of you still standing, I would be interested to pick a few to understand which processes they are looking to outsource and why they have chosen those areas, so we can pick on some new people today.

Inge Kerssens, Electrolux: Today we only have a captive centre focusing on finance, and I guess we are still discussing our future footprint, but from my perspective I am sure there will be hybrid model in the future, and mostly the first processes that we will take on for this are in finance.
I guess the usual suspects are AP, travel and expense, intercompany. We don’t yet have everything in our captive centre, so we are working on getting the general ledger activities into our captive centres so there is still quite a lot in the countries. So the idea is to keep grabbing the high end activities into our current captive centre and moving the lower end to the BPO. I think a year is too short, we won’t have this set up in a years time ...I would say like two or three years.

Faras Bashir: Hi, I work for a Norwegian Oil and Gas company, StatOil Hydro with over 30,000 employees in 35 different locations. I work in HR shared services and the majority of our services today, are in-house. Our first line support has recently been outsourced, but what we are looking at now, is seeing what opportunities there are for either outsourcing or using captive centres and the reasons for that are mainly around globalisation and twenty four seven support, maybe access to specialist competencies and for efficiency gains.

We think, in terms of timescale, that it won’t be this year. Between two to four years as an estimate. We are mainly based in Scandinavia and the Baltics, we have many small countries of under a hundred employees, our challenge is how to cater for the large locations as well as the small locations and getting the right differentiated services across our range of countries. Today our outsourced first HR line support is essentially targeted towards the Norwegian customers, our first line support for HR anyway, I don’t think we can be classified as global in that particular area.

Anon: Can I just ask a question there, it is interesting not only in terms of looking at the percentages relative to those that will maintain versus increase their outsourcing, but the differences relative to the different functions, so finance, HR and IT. I would be interested to get anyone’s input including your own, is that because the finance shared service environment is much more advanced than the other functions, or is it because of cultural issues within companies preventing the outsourcing of more internally sensitive activities like HR?

Ian McAtamney: Well my theory is purely that the financial side is more mature, so it becomes much more commoditised, whereas HR tends to be more ad hoc, and only recently it’s becoming much more commoditised in its approach. My old peers who were heavily involved in the finance side, now find themselves heavily involved in the HR side. So it is certainly a bigger growing area in and around shared services in general.

My journey around captives....I am going to talk about a former company of mine, Reuters, which started on the shared services route back in 2001, at that time they had in-country finance functions, very autonomous, very decentralised. And we went to five regional service centres to cover the whole world, one was Singapore for the Asia Pac region, Amsterdam for continental Europe, Nicosia for Middle East and emerging markets, UK for UK and Ireland, St Louis for the Americas, and we also put one down in Buenos Aires to cover Latin America.This took about two years, and it worked very successfully. But at that time in 2003 Reuter’s revenues were dropping off with the consolidation of the banking industry, and I think at that time they made their first loss. So as a management team it was our task to find a better way of cutting out costs in the operation so we went for a cost play here.

For about a year or so myself and my boss were thinking of going offshore. We wanted to go to India but couldn’t make the case particularly as we had no infrastructure, we didn’t want to take on the risk. So we had to wait until the company started investing more money in other functions, especially around our editorial function, to do that. I have made the assumption that everyone knows what Reuters is, but Reuters is a media financial information company, main provider of data to all the banks, you probably see it as a news agency, so you’ll see it on the press reports on CNN and things like that.

It is also the biggest content provider on the internet today, although you won’t always see it branded as Reuters. But it is a global footprint, it operates at around, at that time 94 countries, at about 16-20,000 employees, and the revenues roundabout £4 billion. So in 2005 we actually created a global business centre in Bangalore. Now this took on all the transactional processing from all the other shared service centres, but we didn’t close down the regional service centres, we changed the focus to take on a much more of an accounting perspective. They took on full responsibility for the controllership, and the statutory accounting and all the local filings. Because those were the last bits remaining in the country, the only other finance outside of shared service at this point would have been the corporate finance which is in London, and the commercial decision support, which we were moving towards a hub base model at that time still a closer alignment to the way that the business is structured.

One of the things that we did leave behind in the regional service centres was the customer touch point, so we still felt that we weren’t confident enough in India to deliver across 94 countries, the language capability, and the cultural capability. So at that point we left the help desk side within the centres, but two years later we thought enough is enough and we moved the whole lot out to Bangalore. It now covers what you would normally typically describe as a shared service centre that controls 100%, leaving the pure issue of the control element behind in the region.

I don’t expect you to read this slide, but it gives it a quick service profile of what is actually covered from Bangalore, now it’s all the typical transactional stuff around accounting, the GL, the AP, the cash application, collections on the low tier accounts. They also do all of the procurement for Reuters, they also do the full helpdesk support for the suppliers and internal customers as well. The language was not a big issue to overcome, there’s a number of different techniques you can use to deal with the language aspect, that’s always been a reason for people to not put everything into India. But I can tell you that it really isn’t an issue so long as you approach it the right way. That is a different topic all together and I can talk for an hour about how you can overcome that.
Some of the different things you operate once you do go to a global centre, this time SOX was a very big, the massive advantage you got on the SOX side cannot be underestimated. Because now most of our controls are operating from one location, so you should see a reduction in the audit fees because they just need to go to one location to do all the audits. Rather than spending huge amounts of T&E flying all around the world. We actually had some good value high knowledge based activities out there, particularly around transfer pricing between all the different units, which requires a high degree of accounting knowledge.

One of the reasons why we went captive rather than BPO was that, at that time we could not see the costs of the outsourcing route add up, we thought we could do it much cheaper than any BPO could. We also had good transformation experience within the company from building our regional service centres so we wanted to capitalise on those sorts of skills, and we were just big enough to make the investment worthwhile in creating an offshore centre. If you ask me what that size is, if you’re looking at creating a service centre between 100-150, that is the borderline where it becomes worthwhile, and the effort and the pain you go through will get a payback within a year or so. We didn’t have much confidence in BPOs and handling our geographical diversity, they tend to concentrate in certain areas or skill sets like predominately English speaking rather than covering all language capabilities.

But we did make use of tactical outsourcing, we outsourced our scanning and our statutory accounting worldwide, which I was surprised to not see a bigger number on the top areas to outsource in the areas to outsource. I think if there’s one enabler to get rid of that really local knowledge around the statutory accounts, you don’t want to employ people that are experts in the different regions that you operate in. You want to give that to an expert and take an extended trial balance from your systems, and leave them to deal with it.
At the time when we were looking to outsource there was really only one player in the market, at the time (we did this back in 2003-2004) which would have any confidence in doing it. We also worked with some other companies, who were going down the same sort of route, and we shared data and came to the conclusion that there was only one provider, that was Ernst and Young. Today there is a lot more competition in the sector, so PWC is another example where they are trying to push very heavily in this sort of area and sorting out the processes.

On the VAT side it is actually the reverse, PWC has been doing this for a number of years now and have a very honed operation around dealing with the VAT across the European market, in a very automated high efficiency way.

Some of those who said that they were running captives I would be interested to understand why they went the captive route rather than the BPO route. I assume all of those that I haven’t spoken to yet are probably operating captives. On the table, someone who has taken the captive route, can you please explain sort why you have taken the captive route? And was BPO ever on the cards?

Lydia Marshall, ITT: I am Lydia Marshall of ITT, a US company, a global company, and we have a shared centre in the UK which I set up for accounts receivable three years ago, it is still progressing, so we’re really new. And basically we are emulating the shared service centre in upstate New York, which is more than ten years old, which is mature, and well established. So why did they go captive? I think it just happened, it was natural evolution, they were doing their job in AR efficiently, and then they sold parts of the business. But they had been so efficient that once the businesses had been sold off, they asked ITT if they could continue to collect the cash and assess customer risk, and it turned out that they became a centre of excellence. Now we are doing the same thing in Europe, does that make sense?

Ian McAtamney: It does indeed; do other people have a similar experience with their captives? Was it basically to evolve rather than a conscious decision?

Anon: I think from my perspective we have a captive shared service centre supporting resources within Europe, and we made a very conscious decision to have a captive from a corporate cultural perspective. We wanted to make the finance function, rather than just a processing function, maintain it as part of the corporate culture and making sure a lot of our corporate thinking was also emulated out of the shared service centre, so that is why we have decided to keep it as part of the family so to speak.

Ian McAtamney: I haven’t heard from that table there, so I assume that some of you must be running some captives.

Gary Hollington, Marks & Spencer: We set up an accounting centre in Salford Quays approx 6 years, lifting and shifting a lot of the finance functions from London. 2 years ago we set ourselves up as a shared service centre, a significant change for the centre which we aligned with the implementation of our ERP system, SAP. At the time we felt that considering BPO was a step too far given the volume of change that was occurring and also we felt that moving to a shared service centre would meet the business needs whilst gaining the maximum benefit from the current resources. The captive model makes sense from a location and cultural perspective for Marks and Spencer at present, albeit as the centre grows from a transaction volume and footprint perspective we will need to consider all options, including BPO.

Ian McAtamney: OK, and I haven’t heard anything from that table right back there.

Kieron Kennedy, EON: EON is a large energy company based predominantly around Europe. We have got a mature captive shared service centre in the UK, which does procurement, HR, facilities, financial services etc. In terms of, as you said, I don’t think it was a conscious decision and a design in terms of when it was set up. It kind of developed that way. I think it’s at the point now where we would be looking at outsourcing options, but the real prize is in terms of Germany where predominantly there is no shared service centres. So it is really about taking the model from the UK across the rest of the group, so it’s more about how we develop shared services in the group and then look at outsourcing. So I think it will be looked at in terms of a roadmap, and so now there will be conscious decision making but it’s just been part of the journey.

Ian McAtamney: And will you be looking to go offshore as well rather than just keeping in the UK?

Kieron Kennedy: Well I would have thought so, probably more near shore but we will consider offshore as well, With the current economic context lots of people are under pressure and looking for cost savings so that is one of the things that we’re doing, and I think we will be looking at off shoring or near shoring as a part of that solution, so yes. In terms of outsourcing it is going to be in there but I think it’s more the cultural change to actually go to a shared service model in the first place before moving to that.

Ian McAtamney: When you expand down the road are you going to look to outsource rather than to try to create an offshore captive or a near shore captive yourself?

Kieron Kennedy: No I think we will be going captive, off shoring is something which I think we will look at more in the longer term, I think certainly in Germany that wouldn’t be the focus right now, I think it would be a massive step for them to go to a shared service centre. Because they are used to controlling things so that the idea of not being in control of resources is quite a step in itself before you start to frighten them with pushing it outside. So I think that is a little bit far in the next couple of years.

Ian McAtamney: one of my experiences in this area, Reuters, had a joint venture with a company called Equant and the JV was called Radianz. We had pretty close ties with this company and during our shared services route we pretty much followed the same strategy in the way that we dealt with our shared services going down the European route. We had the same types of investment in our technology. But when it came to 2004-2005 we took completely different routes and the companies are similar in size, revenues, and geographical footprint. They went BPO with Accenture, and we went offshore captive. The head of that, Graham Russell and I have always had a great debate over who made the right decision, in the end I think we were both right, we agree to disagree.

Anon: Can I just ask, it was an interesting point that you were making earlier about the person that had the UK shared service centre. I would be really interested to understand any companies that either have a UK shared service centre or are currently looking at developing shared service centre outside of the UK. Has the weakness of the pound made a difference in your decision making process and the economics behind that decision?

Anon: No difference, we are seeing some clients who are looking at offshore, activities offshore, but within Europe the strength of the Euro has actually significantly changed their decision process, because the mathematics have changed so much in the last few months.

Ian McAtamney, Shared Services Consultant to Travelport Galileo and former Global Programme Director, Thomson Reuters

Ian is the Shared Services Consultant to Travelport Galileo (owned by the Blackstone Group) and has been working with them for the last year on their Finance Transformation Programme that includes a global shared services rollout, company integration and ERP rollout & enhancement. Prior to Travelport, Ian was Global Programme Director at Reuters and was responsible for the business transformation, design, technology and project management for their global business services organisation. This evolved from in-country finance functions in 2002 to a fully global offshored model in India by 2007 and along the way Reuters picked up Shared Service Excellence Awards for Best New SSO (2006), Best Use of Automation (2006) and Leader of the Year (2007).

SSON News and Analysis
Posted: 07/09/2012

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