Shared Services for the Expanding Business

sson people
Posted: 07/09/2012

Most business cases for shared services and outsourcing start with the "as-is" state and seek to demonstrate a comparative world that reduces existing effort, improves existing performance, reduces existing cost and can be created through the benefits of those savings and improvements in a reasonably short time-frame. However, the return to growth after a period of recession will create opportunities for new business ventures and smaller enterprises to expand rapidly. Those businesses will not initially be burdened by the costs and constraints of running historically established, inefficient organizations but will need to avoid building those same structural dinosaurs if they are going to create the competitively successful enterprises of the future.

Probably the first step is establishing recognition of the "single instance" organizational structure (whether internal shared services or outsourced) as an applicable model for the aspiring smaller business as well as the existing multi-site or multi-national. Given the relatively broad acceptance of the model across large organisations, it was somewhat surprising to see a popular web based discussion forum recently carrying a debate amongst senior finance leaders comparing the merits of solely employing local bookkeepers against contracting local accounting firms to support them as a company expands beyond its current base into other European countries. Before seeing this discussion, it would have been easy to assume from the comfort of the world of shared services and outsourcing practitioners that perpetuation of the "finance department in every business unit, supported by local accounting firms" model had already become extinct. We now know it is alive and well and thriving even in the single-source friendly marketplace of the European Union!

Perhaps finance and administrative managers in the small to medium sized business sector have more to loose than their counterparts in larger enterprises who have seen the benefits in recent years of alternative routes to a top flight career. The FD of a smaller company is still likely to have a very hands-on role covering a very broad spectrum of business activity and is possibly still used to a culture that defines success by number of staff and areas of responsibility. Their counterparts in larger firms are more likely to be aware of the rewards that can follow running a very lean operation and the individual career opportunities providing personal financial insight to the commercial decision making process. But, ultimately, there has to be a workable shared services model readily available to adopt before there can be any hope of that adoption.

Outside any inbuilt market resistance, we need to see if we have a product that can be attractive to that market and makes sense for initial implementation on a small scale. It should be easy to understand the future downsides of the distributed, duplicated operational model but buy-in to the shared services model can only take place when both the long term and short term practicalities are desirable and achievable.

Going back to the discussion forum debate, the circumstances appear fairly typical of the first point where the foundations are laid for the organizational model that will grow alongside the company’s business expansion. The company has already built its home market and services it from one or two business locations enabling everything from product manufacture or sourcing through to distribution, administration and general management. Perhaps there are some remotely based sales or other activities but they can be managed from the core infrastructure already in place. Then comes the opportunity to expand into other areas where it is going to be advantageous to have a physical presence, maybe to provide a sales outlet or to manage distribution or simply to satisfy the local market that the business has visibility and some form of commitment to it. It is likely that a locally registered business entity will need to be formed to comply with local tax and statutory requirements. At this stage the alarm bells should be set to ring. We are in the danger zone where we take the first step towards the complexity and business stifling tangle of multiple instances of every possible task and function. It’s time to step back and see what the business really needs to support its expansion and define its future organization structure. It is this point in the development of the business, not when there are 100, 500, 1000 or more administrators spread around the globe, that the decisions about outsourcing –v- internal, systems infrastructure, processes and organizational design need to start being made. What’s more, at this stage most of these choices are free! (Or as close to free as possible). There is no huge organization to make redundant or relocate, no historic cumulative systems investment to scrap and start again, no oversized real estate portfolio to re-let or dispose of and, most importantly, no big management team who, "like asking turkeys to vote for Thanksgiving", have a vested interest in maintaining the status quo.

With the exception of initial configuration and process set up costs for a new ERP, most of the costs of going straight to shared services or outsourcing without first building the traditional dispersed organization are pretty much in proportion to the growing requirement for their use. The cost of setting up an ERP may be a bit of a larger step but that should still be more economical (and it will certainly be more manageable) than allowing the perpetuation and proliferation of organically grown solutions that then have to be replaced and migrated later. Several ERP suppliers seem to have recognised that the large enterprise market is virtually finite so there are plenty of routes of entry to implementing scalable systems. Early build of scalability is the key. It will establish a platform that can support further growth without significant further cost, thereby delivering substantial potential competitive advantage.

If Outsourcing appears an appropriate course, longevity is important. The outsource provider should be able to support the anticipated growth (and more), not only in terms of transactional volumes but also further market and geographical expansion. A single outsource provider that can meet the company’s growth aspirations for 5 to 10 years is a good starting point. Limiting potential by contracting with providers who only have limited reach will become an obstacle in future and may be costly to overcome. It is true that smaller businesses may not provide the instant revenue streams that are highly desirable to the industry today but good outsourcers should recognise the real growth potential of their clients and become a partner in supporting that growth rather than just a supplier looking for a quick win. Costs should, therefore, still be reasonable even without the leverage of substantial volumes from the start.

Setting up the foundations for an internal Shared Service organization should also be very straightforward at this stage. The business volumes may not yet justify migration to a new low cost off-shore location (although there is no reason why even a business operating in just one country shouldn’t locate its administration functions in another if the volumes and values make it cost effective to do so). The simplest way to design the first steps is to prepare a business case that visualises the most appropriate structure based on a model of the business having achieved its 5 to 10 year goals (or at least, in the absence of defined goals, its aspirations) and then scale backwards to today’s starting point. This may initially lead to developing the in-scope functions and expertise in their current, original location to support the new markets before migrating elsewhere to realise further efficiencies in due course. If the initial build meets the criteria of value, efficiency, affordability and availability of skills and knowledge, future success will be driven by attaining greater benefits of scale, higher performance and lower cost (including location) as they become attainable.

By starting a shared services or outsourcing program at the early stages of expansion, all the advantages of consistent data management and reporting, control, compliance, risk management and high quality performance can be enjoyed from the beginning. Cost benefits are no longer those of savings but of not spending unnecessarily in the first place. That will continue to add growing value.

Jim Whitworth is an independent shared services specialist who has managed Shared Services programs for leading global businesses including CA, Hitachi Data Systems and TRW Automotive. Much of his earlier career was spent with rapidly expanding small and medium enterprises which has prompted his interest in developing the shared services model to benefit all sizes of business. Email: jim@hwml.fsnet.co.uk

sson people
Posted: 07/09/2012

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