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

The following is the second part of a session, Ian McAtamney led at SSON’s Shared Services Summit that ran in February, 2009 in London. Unfortunately many of the participants names are missing as at this point discussion was getting fairly heated and lots of people forgot to introduce themselves…

Ian McAtamney: When we did make the decision to go captive, clearly location was an issue. India offered the best opportunity for labour arbitrage, a good capacity for good skills and good track record for finance activity. Because we didn’t have a strong presence in India we weren’t planning to go that way intially.
We were actually going to go to Singapore where we had an existing service centre and start building a centre of excellence on top of that, still getting a good deal of labour arbitrage. We knew that we had a very good quality of staff there who had been operating very well. But location decision changed when the company started to invest huge amounts of money into India to beef up the data analysis around our editorial side and our banking information.

One thing that I always wanted to avoid was that I didn’t want to be dealing with all the local authorities in terms of getting an office, kitting it out and setting up the support functions. I really wanted a ready made infrastructure to use. So once we could piggy back onto that, we did do.

As I said, the skilled staff are readily available in Bangalore, but at that time the language skills were a concern. We tried to do some languages initially through Bangalore and found we mostly struggled with the Asian languages, Japanese and Korean in particular rather than the European side. Also because it is Bangalore you can get all sorts of tax benefits if you go for software technology park registration, which gives you nine years tax free on operations there. If we had gone the BPO route the location would have been less of an issue for us because then you would only be concentrating on their capabilities, the cost, the way in which the service levels are delivered, and how they organise themselves. I would argue that location is less of an issue than when you’re running it yourself.

If your company is going captive and making a big investment in an offshore operation, one of the lessons I learned is that when they do this suddenly everyone in the company jumps onto the bandwagon. So we had an office with the capacity of about 1000 people, and space ran out before I managed to hire any staff within the country. I ended up doing the one thing I didn’t want to do which was getting an office, kitted it all out, and building up all the support functions with a second site. Luckily I managed to get one of the office buildings down the road from our original one which made life a lot easier.

When going captive, and even if you are going BPO offshore, there are a lot of things that you have to overcome or think about how to find a solution to...and some of the solutions are going to be a good deal different to what you do when you are creating a onshore service centre.You need to know how to figure some of the language problems and the culture is going to be a big issue. What I have found in India is that the Indians culturally are very good at dealing with the European market and the American market but poor at dealing with the Asian market, where there is a stronger affinity with China. Also, if you look at where most Japanese companies outsource their services to, it’s always to China rather than to India.

You need to think about how you deal with the time zone support which if you’re going to operate one centre, you will need to follow the sun which invariably means operating a shift pattern. But this has its drawbacks as well, it increases your costs, the people doing the nightshift tend to jump ship more often and you need to be careful how you manage the attrition on that side.

You need to eliminate paper, clearly you are not going to send your expense receipts out to India, every time you want to do expense claims, you need to look at how you would deal with those sorts of activities.
The same with invoicing, you definitely need scanning workflow in place if you are going to operate in an offshore captive market. Technology will present some challenges. Clearly you have got to have networks good enough so that you can operate your infrastructure remotely and since you are going to be relying heavily on your workflow everyone is going to have to be able to access your technology.

You need to be very strong around your governance as well because when you try to convince people that you want to go down this route it is going to be the governance issues they will focus on, particularly at the senior management level. They are going to want to know that your controls are going to be very strong because their perception will be that because of the distance, they will worry about how strong the oversight is going to be.

You need to look at the service levels. They tend to be driven by culture as well. I know that when we had a regional centre in Amsterdam the Dutch had their own approach to service delivery which can be a bit more forthright than other European locations, and India also have their own approach to service levels too.
Staff attrition. India is famed for having high attrition, so you need to look at how to manage that and I will touch a bit on the issues that we faced later. Also, you are going to find that when you go to some of these locations there is going to be legislation which will place restrictions on what you can do. I know particularly for India they have very strict restrictions on use of Voice over IP technology. Unless that is, you want to register as a call centre which means that all of your traffic is open for inspection by the Indian government, which Reuters didn’t want to do. So although the company is running a VOIP across the whole network, India was closed off to the rest of the company in that respect and that limited some of the things you could do.

You will want to look at your process readiness when you go down this route. You want processes that are more or less mature, you don’t want to be reinventing the wheel or be moving unstable processes because they will just be unstable for a lot longer, making a lot more noise which could break your programme.

Clearly, if you are going to put all of your activities into one location you have got to think about disaster recovery and how you deal with that. In India there have been examples of when a famous film star dies or commits suicide, there are riots in the streets and you will need to look at how to overcome that.

I think that a lot of people choose the outsource route because they think that they can bypass the staff turnover issue and high attrition. Which has never been the case, whether it has been with the outsourcer or within your own organisation, it is still going to hurt you in a big way. And this came home to me with the company, Equant, who went down the outsource route. When their centre head running their part of the operation in Accenture quit on the day that they went live, that caused a bit of chaos in the first month.

Who else runs an outsourced operation here?

Anon: Just going back to the attrition, GlaxoSmithKline financial services is outsourced to India, and attrition is still a massive challenge. Up until 18 months ago it was just under 50% a year which really is difficult when you have got unhappy customers around GSK who are always saying I wish it never happened in the first place, I wish we hadn’t outsourced. What was wrong with it before, and all of those usual sorts of comments? It is a real challenge to keep improving a process when nearly half of your people are going every year.
It is now at 27% which we now consider a minor success, but it’s definitely not where we want it to be, I think the team in India are very happy with that, they see that as a huge achievement and definitely better than many other contracts that they run, but still 27% is high. With the attrition they don’t often tell us that they are leaving, we won’t hear that. So even quite senior people you will find out that maybe the day before they leave, when they have a contract that says three or four months notice, and it gets to the day before and you find out that the person is going, or even you hear that the person is gone. And that is a real challenge especially when it’s somebody more senior, and it’s things like that that you just don’t get your head around, you don’t think that that would be the way that people operate, I have been involved in this now for two years, and still things like that do come as quite a surprise and quite a challenge.

Anon: Does that happen because culturally people in India aren’t giving the notice, or is that happening because your outsourcing partner is well aware of the people leaving and they just don’t want to tell you, they don’t want to bear the brunt of the ramifications of you understanding that a particular person is leaving in two months time?

Anon: It is definitely the latter, they don’t like to deliver bad news, they don’t like to tell you something that you wouldn’t want to hear, so it tends to be that proactively coming forward with that sort of information is not something that they like to do.

Anon: That might be something that other people outsourcing might want to put into their contracts in the future.

Ian McAtamney: Well one of the things that we did in Reuters was to plan out all of the global holidays; India has a lot of public holidays so you need to see how you manage that, their approach to taking vacation is similar to them leaving, - very short notice. If they’re going to get married next week, they sometimes won’t tell you until the day before they get married before asking to take it off. So you need a very strong management team to manage that sort of thing.

Anon: A big question, there have been a number of initiatives, a lot of quite obvious things around retention bonuses and career planning to try to show people that there is a future within this contract and within the organisation. So what we were finding that was happening was that other companies were setting up nearby and paying more than GenPact the provider we were using, so people would see a higher salary next door, so they thought ‘I’m going to work there’. So we would work with the GenPact management team to put together a far more structured approach towards how they’ll develop people, training. I mentioned earlier bonuses, something was put in so that if people stayed for four years then they would get a heavily weighted bonus structure that came at the end of each year, particularly at the end of the fourth year.

Ian McAtamney: But if you’re outsourced, why isit not Genpact’s problem to deal with attrition, why is it still your problem?

Anon: I guess with many of these things, in reality it’s the problem of both parties, we know that our service is deteriorating, and you would hope that the outsourcing provider would be onto it, and would be leading it, but when it was in their hands not a great deal happened, a lot of it was down to our ideas, and us bringing in the schemes to try to change things.

For probably the first two or three years it just didn’t move at all, it wouldn’t drop below that figure around fifty percent. So we really did have to get stuck in which, I think, I don’t want to be too negative about the whole outsourcing overall all but it is something that we had to, you had to get stuck into something which is more than you ever planned to or wished to.

Anon: The more the client engages with their teams the better the partnership works – we’ve taken a very hands on approach and we’re at 17%

Ian McAtamney: Seventeen percent is very good, and how long have you been with Genpact so far?

Anon: Three years.

Anon: The way in which Genpact operate, do they create a team for you? So it’s your team and not shared between different clients? So it’s like running your own service centre...

Anon: I am on the other side we have transactional processing with them our attrition with Genpact is slightly lower, because they feel part of the organisation. There are two things that they struggle with, one is giving you bad news. And trying to train them to give you bad news, especially when you have got moving back office operations moving is a real challenge you have to spend serious time educating them on how to say no to a customer group, which in a shared service especially in credit management is really important. Then the other thing is the holidays, you have to sit down and agree on the holidays upfront and in advance.

Anon: Ian, what was the turnover that was experienced at Reuters? It would be interesting to see whether culturally, because Reuters had their shared service centre in the same country as a lot of the outsourced ones, whether an association or connection to a global organisation has a stronger hold than say an association and working within a local BPO company.

Ian McAtamney: Certainly working with a captive there is a possibility of getting a better identification with the parent company than with an outsourcer, again to my colleague’s comment there, it is all down to how you approach it. If you make them feel part of the company, at least for the first few years you’ll keep your retention quite high, and if you do just throw stuff at them then their first experiences are poor and they will up and leave very quickly. I will comment about the attrition in a second. Does anyone have any comments about any other challenges?

Ian McAtamney: One of the things that I found is that it can be very important to get your own management team into your own company culture, and Reuters had a pretty good internal culture. Once we had established the management team, they moved their own staff away from a typical BPO culture, to feel more part of the company.

In terms of processes, because we are going captive, we have full control over the standards and processes that we want to operate. We actually had the regional service centres design their future model, which included offshoring, so when building the whole thing, no consultants were involved, no outsourcing was involved, it was done by the shared services organisation.

They actually designed processes that would work in India, they helped train and transfer the knowledge out. One of the key success factors for us was that we did a push rather than a pull. A lot of BPO’s operate from a pull point of view, they have the staff and they try to get the information to operate. We did a push, which was very highly measured to make sure that they understood the stuff before they were allowed to run it, and the new team were basically just sitting there ready to receive the stuff rather than going out and grabbing it.
I think this also helps on the attrition side as well because none of them felt that they had been dropped in the deep end, they felt that they hade been helped along by the rest of the company, they felt it was a very positive experience.

Anon: We have found that with a lot of our clients that they, when they first created their first shared service centre that there is a blame culture that seems to develop almost from day one when you start the shared service centre. And we have found that a lot of clients, that the blame culture gets worse when it is an external shared service centre. I was just wondering from a show of hands if people also experience that increase of the blame culture in the organisation when you move say AP or something like that to an external body.

Ian McAtamney: When you look at technology, particularly if you want to go captive offshore, it becomes a key enabler, but there is always a base level where you should really invest in your technology first before pursuing other initiatives. I have always argued that going for a single global ERP system for a global company gives the biggest bang for buck you can spend your money on. If you haven’t got that then I recommend you spend all the effort doing that before anything else. Because, the real value to the company, the one that differentiates you from your competitors, is what you can do with the information you hold. If you’ve got a global system then you are halfway there to getting good quality information to run your business.

What I did notice though is that once we went offshore, our technology took a turn for the worse, simply because when looking at the return on investment, we couldn’t make the sums work anymore. After we went offshore, we had always wanted to go OCR, the optical character recognition, and go for full automation round the payables piece. But whenever we did the sums we found it easier to hire a few more people in India rather than spend huge amounts of money on the technology side. You find that every investment from the technological side starts going through the same thing and gets pushed back as it’s cheaper to hire more staff. For qualified accountants we were paying back then around £3,000 or so a year. It really can be that low. Even with the salary inflation the staff are on a very low base and it is never going to catch up with the Western markets.

When you are looking at those sorts of equations, it was very hard to make the case, since now the owner of the technology was the unit in India, obviously they are the ones that have to make the investment decision because it is to benefit them. What I have found is that there is a culture particularly in India where the number of staff you manage equates to how important you are within the organisation, any sort of investment that is offered to reduce the number of staff gets a no, so not only is there difficulty in making the business case, you’re also tackling the resistance that they don’t actually want to become much more efficient in terms of staff number terms.
That’s a culture shift required to actually see that technology is an enabler for them, to allow them to take on work from other types of activity and move up the value added chain rather than just staying on the transactional side.

Looking at technology, the sort of areas that you should focus on are those to drive up security, and to take away the reliance on the decision making process to make things as rule based as possible.
Use the system to drive the rules; it will increase the quality of work that is happening. That applies for a BPO as well as a captive. In fact I will argue that it is even more important for a BPO, to make things as rule based as possible.

You need to increase your controls around the system, for the SOX side you have to do a lot of testing of your internal controls. If you can automate your controls, you need only test them once, and not bother to test again. If you’ve got a control that for all invoices you must have an approved invoice image, you can enforce that through the system, That way, you don’t have to prove that control year after year as part of your certification.
Use your system to drive as much standardisation as possible. The more standardisation you have, the fewer errors will creep in. Concentrate your technology on reducing error rates and implement self service applications as much as possible. These take out the processing activity and give the control and ownership to the people who are receiving the service in the first place.

Some of the good and bad news: we did see a lot of the benefits from the captive model rather than BPO. Our costs were a lot lower than what BPOs could have done it for. We had much more flexibility, so that we could align our unit to support our strategic objectives of the company and there is a much better acceptance. I think that one of the big differences between a captive offshore and a BPO, is that with a captive offshore, it is part of the organisation, they are part of the same family, and therefore the acceptance is much stronger through the organisation, particularly for global companies where there is a lot of interaction globally. They’re all very friendly people and also there is much less disruption, so it’s a much smoother and successful process.

Watch out for the last part of Ian’s session coming in a couple of days time…

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).