Sharing Services versus Outsourcing

As part of the Sungard Online Series: ‘Making the move to Finance & Accounting Shared Services Centers’ – SSON recently hosted a roundtable session on Centralizing payments. Part 1 looked at standardizing processes and how this can actually build underlying procedures to capture visibility around the outgoing cash flows. Part 2 looks at choosing between shared services and outsourcing and lists the internal challenges when faced with setting up a Shared Services Center...

SSON: What are the benefits then of setting up a payment shared service center as opposed to outsourcing the function? 

HS:  The reasons will depend on the organization. One reason is cultural: where you’ve got a close local relationship with suppliers, you may feel comfortable with effectively outsourcing your payments within the company into a shared services centrer environment.  You can make sure that your invoices still have the right format and still maintain a strong relationship with that local supplier. It also helps you to stay close to your bank, especially now when relationships are often more fragile because of the constraints on financing. Maintaining that closeness of relationship and working directly is an important feature.

Another issue is to do with who your outsourcing provider actually is.  If they are a bank then that limits your flexibility in terms of banking relationships potentially. It may be considered to be a core activity that you don’t want to have the risk of outsourcing to a bank or to a third party vendor where the long term feasibility of the business is questionable. 

CJ:  When we think about outsourcing versus setting up an internal payments shared service center, it’s important to distinguish between outsourcing the role and the function versus outsourcing some of the connectivity and technology pieces. Everyone recognizes that all vendors who are receiving payment are not equal.

An organization must maintain a very good relationship with their vendors because they’re a key part of the financial supply chain. They’re a key way of delivering and increasing efficiency in how you do business.  If you outsource everything, there’s not necessarily as much of a driver to improve your relationship.

LB:  What we’re seeing is that a lot of clients make a distinction between internal shared services and outsourcing the plumbing. SunGard not only hosts a payment factory but a managed service to cover the plumbing: the infrastructure hardware and software to automate the centralized process. Designing the process and making sure that it is operational is of strategic importance and is typically not outsourced.

SSON:  Once a corporation has a smooth operating payment shared services center in place, how can they make the move from their payments factory to a corporate transaction banking platform? 

LB:  The term payment factories itself does not cover the entire spectrum in terms of business veins and complexity. Sending a payment out the door is a very simple process, although it entails quite a bit of complexity. However, building a business case might be challenging for corporations. 

So we thought about the kind of adjacent workflows which are building up on processes that are typically implemented in a payment factory.

Payment workflows are traditionally at the core of a payment factory but a similar process might be sending out a collection instruction, also known as a direct debit instruction - leveraging that payments factory concept for non- payment business workflows. Another workflow can cope with account statements. Another with treasury deal confirmations. We reflected on another term of a solution and we actually ended up with the term ‘corporate transaction banking platform / system’, which is really a system used by corporations to tap into transaction banking services offered by their cash management banks.

SSON: When an organization is implementing a payment shared service center, how are internal challenges best overcome?

HS:  There are five key internal challenges:

  1. Initial upfront costs: One of the ways of addressing that is, to have a clear business case and a metric on the performance of the shared service center. 
  2. Sponsorship Challenge: Ensuring those internal roadblocks can be cleared. Senior level sponsorship is critical to almost every one of the organizational challenges that are likely to come up. 
  3. Structural challenges: particularly when there’s a conglomerate or a holding company with a lot of joint ventures. The challenge is the shared service center can only apply to a certain part of the business rather than the joint ventures.
  4. Mergers and acquisitions: It’s about planning and making sure that you’ve got a very clear migration plan for new entities coming into the group and how you’re going to migrate payments. 
  5. Sharing cash management business between providers: The difficulty arises when you’re fairly highly leveraged and you’ve got your own core financing relationships. This makes it harder to centralize your payments activity to the extent that you want for one or two providers if you need to be seen to be providing ancillary business. It’s about making sure that you are spreading ancillary businesses and finding other ways of giving value back to your bank. 

CJ: Helen gave a great recap of some of the biggest internal challenges. One area of focus or challenge has to be attention. There are so many key issues with opportunities that an organization is confronted with that sometimes it’s hard to bring this type of activity and idea to the forefront. Building a business case is certainly important and it’s vital that it doesn’t focus solely on the financial benefit, the benefits of efficiency and working capital optimization; it also has a link to some of the strategic aspects of what the business is trying to do. Look at ways to help the business be flexible, adaptable, resilient, and manage its growth if it’s a growing firm. Linking and tying in those key strategic components is vital. 

Creating a structure that allows for growth, provides for the ability to grow, as well as achieve a reasonable return on investment for the activity, is one aspect.  The second item that seems to emerge as a challenge has to do with complexity. When you start talking about centralizing, there are numerous people who have various reasons why they want to keep things centralized but there are also numerous systems, numerous processes, and sometimes they can almost seem overwhelming. There’s too much complexity and we can’t really solve that. That can and should be solved through creating a clear and prioritized roadmap that delivers benefits in an incremental and organized fashion, both from a process consistency viewpoint as well as from the plumbing and connectivity perspective.

LB: I would like to add one remark related to implementing an underlying technology solution, which is you need to have a strong sponsor in charge of the entire process. This is also making sure that from a technology perspective, once decisions have been made, that the implementation plan is actually focused on the return on investment, as was documented in the business plan and that, like Craig was referring to, ROI is protected by going after low hanging fruit, so to speak, first, and create some successes first. Typically, what we see in larger centralization exercises, which have a technology component, in the sense of implementing a payment factory, we do see that that is a challenge, that people tend to actually expand scope and basically protecting that scope and making sure that there is focus on the low hanging fruit items, so to speak, is one of the challenges. Having strong project management skills is obviously a solution to overcome that challenge.

SSON: Thank you all so much for taking the time to participate as part of the SunGard series on SSON. 

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