How to Quantify a Shared Services Opportunity

BH: Tony, thanks for taking the time to speak with me today. I’m interested in learning about Armstrong’s shared services journey. What kind of a shared services model have you established and what drove this model?

TL: There are really two paths of history here. One path is that we’re about 12 years into SAP. So when we first implemented SAP back in 1999, we established a shared service center for A/P and transactional HR. That's been in place since 1999. One of the more recent drivers is the influence of a new ownership structure and a new management team. And this team believed that what we’d built up in shared services could be leveraged for additional functions as well as scope. So, in part to address corporate SG&A savings and in part to drive standard process, we initiated research in this area, about two years ago.

To start off, we brought in outside advisors to help us understand where we were and what the opportunities were. Deloitte was a primary partner in that study. As a result, we quantified the opportunity. We could see where the shared service industry had matured and the contributing role technology played in this, even within our SSO. So the question was: what else can we do with shared services?

BH: So where are you today, Tony?

TL: Today, from the Global Business Services team, we run F&A, HR and IT. More specifically, in F&A we run invoice to pay, order to cash (credit, collections, cash app, disputes), and corporate/business unit accounting (reconciliations, journal entries, close processes, reporting, budget/forecasting support, plant accounting/close/analysis support, inventory analysis). We also run all of global IT: applications, infrastructure, and business relationship management. Asia IT runs a bit differently – it has a dotted line into Corporate. For HR we run personnel administration, benefits administration, compensation administration, pension administration, payroll administration, and reporting – plus some administration functions that free up the HR Center Of Expertise (some Affirmative Action reporting, staffing/recruitment support, etc).

BH: How would you describe the main change in focus today, compared to where shared services started?

TL: Well, it went from a shared service function that contained essentially accounts payable and a couple of other minor things – travel and P-cards and such – and HR … to today, where we have built an organization that includes all of the shared functions of finance in a single organization. So it really went from a group with, let’s say, two managers – one for AP and one for HR – to an organization with multiple director-level managers who have broad responsibility for both processes and scope.

Obviously, we leveraged what we had, expanded the scope to include other transactional and activities that can be centralized, built an organization, and then outsourced for labor arbitrage and process standardization.

BH: I'm going to come back to outsourcing in a moment. I want to focus right now on this move to globalised services. Is this focus on globalization in support of your growth markets?

TL: When we came under new ownership and the new management team, one of the strategic shifts became operating the units as global businesses, not as regional businesses as had been the case. That mindset shift enabled us to look at services from that same global perspective.

BH: How is outsourcing working? How did you pick partners for various functions?

TL: Once we decided on a scope of operations we followed an RFP evaluation process, developed detailed criteria and talked to many vendors. Deloitte led us through much of that process – the "How do you think of this? How do you scope it? How do you size it?" debate – in order to get credible vendor responses. Certainly, price was a consideration, but we also looked for demonstrated ability to do the work, references, what they could bring to the table in terms of process improvement opportunities and sets of standards processes, etc. It was a little bit different for IT, since this was more of a re-competition, if you will, although we did elevate our assessment criteria

BH: And did you change your IT partner as a result?

TL: Yes, we switched vendors.

BH: What are the geographies that you serve, Tony? And did outsourcing decisions vary by geography?

TL: We didn't make outsourcing decisions by region; we made the outsourcing decision based on vendor global capability. GBS performs work for business operations in North America and Europe.

BH: what has been your experience across different countries?

TL: Well, so far the experiences have been mixed. The F&A for our European businesses has gone very well. One of the reasons it's gone so well is because those functions had been outsourced in the past: We went through an outsourcing about five years ago, so that was fairly well documented and fairly well managed. It really went vendor to vendor for that piece. The rest we haven't started in earnest yet, so while we’re working through the transition, I’ll reserve comment.

BH: What has the take-up been from the business units, Tony? It's natural to experience some resistance. What's your experience and how are you trying to encourage support for your global business services at the local level?

TL: This has probably been the hardest aspect from a couple of perspectives. First, in North America F&A we've never done significant outsourcing, certainly never on a large scale as is the case now. So there was a lot of skepticism in terms of someone else being able to do what we do to the same level of quality and ownership. You have to remember we are a 150-plus-year-old company and we have a large number of highly experienced and tenured employees who are very dedicated. It's a great place to work and a great place to live, so we don't have a lot of staff turnover and we have a lot of embedded knowledge in our processes.

So one of the big challenges was how we could capture all of this knowledge – the kind that people "just know". People use the term "tribal knowledge". That's a pretty good description. In addition, many of our processes – probably most – were not documented. So it was a huge challenge – how was the transfer of knowledge going to happen? How do the retained activities meld into the retained staff’s responsibilities? Who would be able to do this work and how would we qualify the skills and capabilities? Who would be accountable? We had to overcome that through a lot of debate and interaction. And some of it's still not overcome – at some level, people just don't want to have an outsourced/offshore provider. And GBS continues to learn how to manage a contractor.

No one really had an issue with centralizing GBS – i.e., bringing functions together under a common process ownership banner. It was really more the emotional issue about outsourcing. It's hard for people who have been long-term employees, who’ve done a really good job over the years, to understand the rationale of outsourcing. Plus, it introduces risk in process stability and quality until a vendor can fully traverse the learning curve. It’s very challenging, but the ultimate proof is in operational performance.

BH: I’d like to ask about your regional strategy. You've explained that GBS services all of North American and part of Europe. How do Russia and Asia fit into this? They're important growth markets. Why would you opt for them setting up their own shared services instead of leveraging your existing global services from Pennsylvania?

TL: We may at some point chose to integrate, but there are a couple of reasons why these markets you mention are different. One, they're growing, so the thought process is: let them grow; don't introduce this change. The second part of it is that we are essentially building their shared services functions in country in order to meet many of the local requirements, some of which are beyond our experiences. And the third part is that we did not want to bite off more than we could chew, at any given time. So we've left Asia and Russia as separate teams with "dotted line" accountability to corporate. There is some uniqueness regarding the business in those regions that we felt made this the right approach for now.

BH: I’d like to ask about your role specifically, Tony. You're CIO and you're also Head of the Global Business Services. What is the advantage of combining these roles? And is there a disadvantage to this – in terms of perception in the company, perhaps?

TL: I think the "perception" in the company is fairly neutral, where there is an understanding of the benefits and rationale. People still have to deal with IT staff, or AP staff, etc. From my perspective, given what we’ve seen IT achieve over the years – in terms of the ability to run IT as a global function – we're seeing opportunities for GBS, but we have a long way to go. I think the other expectation that people have, since I have both GBS and IT, is that I ought to be able to make IT things happen faster or GBS things happen faster. I wish that were true, but it isn't. When thinking of processes that span IT and GBS, we do have an opportunity to identify and improve some end-to-end services (such as hire-to-onboard) that are predominantly performed within our team, and we have goals to make progress on this in 2012.

What is notable, though, is that IT is a global service – it's a set of common processes and common deliverables with local touch points. And really, GBS is the same thing.

BH: I think where you would have a greater advantage – or rather GBS – is that you have a seat at the senior management’s table. One of the complaints that I often hear from leaders of shared services is that they feel their voice isn't adequately heard. Presumably that is not the case for you?

TL: That's a true statement. There's a lot of executive support for building GBS and that's been really helpful. I certainly appreciate that support. But once operations are up and rolling we're going to have to earn that support at a different level, namely from performing to our customary level of quality and speed and gaining our customers confidence. Right now it’s a company-wide initiative, we want to get this done, and so we have support to do that. It'll be a challenge for us going forward, but given the staff that we have and the management team in GBS and IT, I'm confident we'll get there.

BH: When is the go-live date, Tony?

TL: We’ve already established the central GBS team, so that part is live. From an outsourcing view, we have a rolling go-live schedule based on a transition plan and the outsourcer’s performance during a ramp-up/pilot phase. We didn't want a big-bang approach – we wanted somewhat of a measured approach. So for accounts payable and some core F&A functions we're already live. We're live for a couple of plants, and then we have a number of plants on a monthly basis where we'll roll out GBS assumption of some of the finance activities for those plants.

In IT we're about to go live for our North America transition. For some of our business in Germany and the UK, we're working through the go-live plan right now. And then we have, as in F&A, a series of rolling go-live dates that are backed up by a proven transition model and plan. So that's how we've managed it, in bits and pieces.

BH: And how might you decide on increasing either the scope or the functions that are covered in GBS? Do you have a plan for bringing in additional services?

TL: We've actually had functions knocking at our door: "Hey, can you take over these kinds of activities?" And we've essentially pushed it off until we get F&A stabilized. We’re working through a standard process for bringing new services into GBS.

BH: As you went through the last year, obviously you had companies like Deloitte advising you, so you’ll have had a certain insight into shared services operations at other organizations. To what extent did you look at others or benchmark informally to see what could be done? How did that help you make your decisions?

TL: It was more a demonstration of the fact that other companies are doing this and they're doing it successfully. You get a flavor of what can be done by talking to other companies, talking across the vendor base, getting involved in site visits and other kinds of benchmarking. We did perform a high-level benchmark analysis early in the feasibility cycle, which pushed us in this direction.

BH: In evaluating your global business services, the plans that you've made, the various implementation stages you're at now … what do you hope to achieve for Armstrong through GBS? And how might this evolve in the future?

TL: I think of it in a couple of different dimensions. One is efficiency and productivity improvement for the processes we assume. As we’ve gone through the transition, we’ve assembled a list of improvements and opportunities for consistency. By standardizing core processes you can optimize and gain productivity. So you can use that productivity dividend in a couple of different ways. One way is expand GBS’s scope, so that's certainly an option. Two, is you can save some cost. In fact, we have some operational efficiency requirements built into our contracts.

Cost benefit is achievable in other ways. The cost to deliver service is an important measure to us. And through process standardization and the application of best practices we hope to gain cost advantage; and obviously through labor arbitrage we hope to gain further cost advantage. And we want to be in a position to scale an operation to support additional business growth.

Another aspect that I’ve not mentioned is the ability of a GBS to take administrative and transactional work off of people’s plates so they can concentrate on their own value-added activities. We know in the early stages that it will not feel that way, but once the operations are stabilized, the staff will have more available time.

BH: Thank you, Tony.

For more on setting up a Global Business Services Model, see: Global Service Delivery: From "If" to "How"