The Recovery: What Now?

SSON News and Analysis
Posted: 07/09/2012


Over the past few weeks, growing evidence has emerged to suggest that - following one of the most turbulent episodes in modern financial history and, subsequently, the worst downturn since the Great Depression - the global economy is finally escaping from the storm clouds which have engulfed it for at least a year. News that the US had emerged from recession in the third quarter of 2009 came hot on the heels of a report from the IMF which positively glowed with optimism:  "The recovery has started. Financial markets are healing and in most countries growth will be positive for the rest of the year as well as in 2010," said IMF chief economist Olivier Blanchard before a meeting of the IMF and World Bank which went on to predict 3.1 per cent growth globally. While some economies remain sluggish at best, the sentiment increasingly pervading the corridors of power is that the worst of the slump has passed and that a global recovery led by the leading Asian trading nations (the IMF revised their prediction of growth in China next year to over 9 per cent) has begun in earnest.

While recognizing the dangers of counting unhatched chickens, it does at least seem that for large-scale organizations the world over the general theme of the day has moved from the urgent fire-fighting which characterized the early part of 2009 towards "recovery mode": having taken the necessary steps to remain above water during the worst of the storm, companies are now working to ensure they remain fit for purpose and competitive during the recovery period while looking to take advantage where possible of the new market landscapes which are clarifying as the sun slowly rises. But how is this clarification likely to manifest itself over the medium term - and, crucially, what then will be the role of shared services during this period of both consolidation and new, broadened horizons?

Perhaps the most obvious impact of the recovery on shared services globally won’t be shared-services-specific: improved economic conditions will see organizations enjoying an easier time generally with less pressure to find urgent cost-savings (and thus less pressure on headcounts and discretionary budget). While it’s important to bear in mind that the recovery will not take place at the same rate in every corner in the world - hence the emergence recently of the concept of a "LUV" recovery, with a slow L-shaped recovery in Western Europe, a U-shape in North America and a V-shaped recovery enjoyed by many emerging economies compared with - and, therefore, some organizations continuing to face much less clement trading weather than others, an improved outlook generally should understandably lead to improved conditions for shared services in particular.

However, global organizations don’t have the advantage or disadvantage of operating within one trading climate alone; different geographies and thus different parts of the business will be moving at different speeds, and one of the primary responsibilities for shared services within global organizations will be to cater for these discrepancies - and help to minimize their impact upon the parent organization as the latter seeks to pick up the pace where possible.

"Economists talk about ‘V’ and ‘U-shaped recoveries," says Rick Bertheaud, Managing Director, Procurement at sourcing advisory firm EquaTerra. "The same principle applies internally: how will volumes increase, how fast, in what sectors, in what geographies, etc. The need for effective planning and communication with client organizations is critical. You need to make sure there are explicit conversations around trade-offs between investment to advance-build and SLAs – in light of projected ramp speed."

In many ways the financial crisis and recession has acted as a catalyst for developments that were already well underway within the shared services and outsourcing space. Cost-cutting, increased efficiency, increased agility: all these are advantages already offered by the shared services model long before the bursting of the derivatives balloon made them critical to the survival of even the most august institutions. The ideological shift in the perception of traditional back-office functions which has led to the development of global service delivery operations has only been accelerated by recent events. Now, any companies still conceiving of their back-office as a mere transaction-processing machine are living very much in the past.

Cliff Justice, National Leader of KPMG's Shared Services and Outsourcing group, believes the time has definitely arrived for the back office to be viewed and utilized as a uniting, standardizing and improving force across geographies and functions.

"Think of your corporate functions as an extended global enterprise," Justice suggests. "The skills and capabilities companies will value most [during the recovery] will be both broad and deep around the extended global enterprise. For example, it is imperative to be well versed in how to design world-class operating models not just for the area being outsourced, but for the entire function. Today, organizations also need to understand both the supply-side levers as well as the demand-side levers, since the demand-side is often more effective and impactful than traditional delivery models can address.

Furthermore, he adds, "companies need to break down walls between functions and begin to consolidate operations of key functional areas. Management should begin to think of services as a rational balance of internal and external service delivery capabilities, with a common governance and service delivery framework that may include outsourcing, offshoring and shared services. Companies are now seeking to eliminate redundancy and improve collaboration among suppliers, internal functions, partners and contractors. This involves moving toward a standard set of performance measures and a common delivery platform globally."

This evolution of shared services’ role within many organizations will go hand-in-hand with a consolidation of the model’s existing responsibility to drive down costs through economies of scale and the ability to leverage specific advantages such as labor arbitrage. This would, of course, always be of great benefit, and particularly so during a recovery when external customers’ pockets are of necessity shallower than they might previously have been. However, today’s situation - the specific "credit crunch" characteristics of this recession - makes shared services particularly well-suited to performing this indispensable role. The financial crisis and consequent downturn have been game-changing in the sense that the credit-driven expansion strategies which predominated over the past few years, as the bubble inflated, are no longer on the table for most organizations. Enter shared services, stage left…

"Most economists are suggesting that the recovery will be relatively slow due to factors such as high national debt, likely higher taxation, and continued high savings rate among consumers," muses EquaTerra’s Executive Director Bob Cecil. "The capital markets are also expected to remain relatively tight.  Therefore, companies are realizing that they can’t go back to the old ways of doing business – taking on more and more debt to fund growth.    Instead they are finding they need to focus on shifting their business models to compete based on cost-effective operations. Shared services is a natural choice for shifting the business model to be more competitive assuming you adopt the model on a broad enough scale. Hence companies will look increasingly toward global, multi-functional shared services."

For some companies, savings-driven transformation won’t just be a nice-to-have: as leading industry blogger Phil Fersht pointed out in a recent post,  it’ll be the only option for many organizations following significant cuts within their existing operating models.

"In reality," writes Fersht, "most businesses are coming out of recession having already cut visible costs to the bone, for example areas where cost can be directly extracted from the business without any form of arbitrage such as travel freezes, headcount reductions from non-critical areas, budget reductions across departments in areas such as marketing or IT, and so on. The next steps are to explore cost arbitrage through labor (i.e. outsourcing), and ultimately process transformation that should accompany any form of outsourcing.  Simply put, it's nigh-on impossible to dig out further pockets of cost, without re-wiring the guts of business operations to find new efficiencies…"

Such sentiments are a reminder that a major existential challenge for many existing back-office operations during the forthcoming recovery period lies in demonstrating why they should be retained in-house rather than farmed out to one of the host of providers whose jostling for position pre-crisis has become a savage fight for supremacy after it. Of course this challenge existed long before the fall of Lehman Bros; in the new economic landscape, however, even all the advantages posed by new-generation back-office structures already mentioned in this article might not suffice to keep the outsourcing wolf from the door - and, of course, nor should they, if the organization’s movers and shakers deduce that the benefits to be gained from sending work outside the company outweigh those offered by even the most souped-up retained delivery mechanisms.

What to outsource, and what to keep in-house, will be one of the key questions for organizations coming back out into the sun after a year or more of gloom and doom. The challenge of course is judging accurately what kind of corporate structure is best-placed to take advantage of an improving economic climate over the next year and beyond - and, clearly, this will vary significantly from sector to sector and from one organization to the next.  As is usual within business, there should be no room for sentiment: even the best-performing retained delivery structures should be cut loose if the business case is compelling enough. However, those companies which do calve off portions of their back office must bear in mind that they run the risk of losing key talent in the process - talent which could prove a huge boon during the vital post-slump recovery period. Retaining the best employees from a no-longer-retained back-office function is an examination which no firm should allow itself to flunk.

"Pay close attention to your human capital – presumably associates that weren’t targeted for downsizing during the recession are amongst the stronger performers in the group," advises Bertheaud. "These same individuals will have opportunities outside the organization during a recovery. Organizations need to be thinking about retention and recognition programs as they prepare for growth. [The] worst-case scenario would be to lose your best performers just as business returned."

Some firms, however, will indeed lose some strong performers (and some have already done so): it’s an inescapable consequence when the kind of large-scale, widespread transformation currently underway meets the need - sometimes sudden and irresistible - to cut costs. This creates another opportunity for those shared services organizations which aren’t forced into cutting headcount (and which can perhaps enjoy increased access to cash after a year of battened-down hatches): bringing in high-quality talent let go by other less-fortunate companies. It’s definitely too early to start talking of another "war for talent" - the disparity between vacancies and job-seekers might not be as stark as it was six months ago, but it’s still pretty sluggish in the recruitment arena compared with the glory days of 2007 - but as the recovery gathers pace (assuming no further setbacks - and remembering the dangers of assuming anything at all) and, at the same time, underperformers are forced to shed staff, it seems a safe bet that SSOs the world over will begin to come once again to the talent well with increasing urgency - which will of course be good news for those talented professionals who’ve spent some time back on the shelf as a result of cuts made during the darkest days of the crisis.

Of course, all this optimism may well prove cruelly misplaced despite all the positive signs of recent weeks: deep structural flaws still exist within the global financial environment and the recent injection of over $50bn more into the UK’s ailing banking system, and dire predictions on deflation and a consequent threat to consumer spending in Japan, are evidence that at least some of the world’s biggest economies are far from home free. The prospect of a W-shaped recession in the developed world has by no means been dispelled so rapidly; meanwhile, ticking time bombs within the insurance and commercial real estate industries have yet to be defused.

As a result, one more challenge for shared services over the next few months (even years) is going to be: how to perform all the roles, and meet all the challenges, highlighted in this article and elsewhere, while at the same time being able to respond adequately to any further economic downturn. Merely because the sun seems currently to be breaking through the clouds is no insurance that those clouds are gone for the foreseeable future. A crucial dilemma for any organization right now is judging how fast and how far the company should be allowed to move onto a recovery footing at all. Rather like generals at war, facing a lull in fighting which could prove permanent or could be merely the prelude to another titanic clash of arms, the problem of how deeply to commit strategic reserves, and where to allocate resources which have been so depleted over the course of the last year’s struggle, might well prove the most profound and consequential of all.

(Want more on this topic? Check out SSON’s experts’ Top Ten Tips for Preparing for Recovery    )

http://fersht.typepad.com/the_outsourcing_bloghorse/2009/10/shrinking-business.html#more
SSON News and Analysis
Posted: 07/09/2012

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