The World's Next Top Model?
"Globalization" is the buzzword du jour as organizations distribute work around the world. But when it comes to shared services, are you really optimizing global delivery? Have you thought about serving Japan from Brazil? Or are you stuck in the old school of setting up a captive center in Poland to serve the U.K.?
If you’re like most companies, the answer to the last question is yes, probably because you’re still using the maxim that says, "Thou shalt always put support services somewhat near your internal customers." But the truth is, if you continue with this model of yore, you’ll not only take on higher costs and miss the full potential of global talent, you’ll also end up with redundant investments when you later move to the current globalization standard.
So what is today’s standard? It’s not about exporting a process. It’s about decomposing that process, determining which parts can be standardized, and then moving those parts to the most appropriate location. What you get, then, is a hub-and-spoke model that distributes work among three tiers: low-cost hubs for the transactional activities, thin nearshore centers for activities that need a regional presence, and limited onshore sites to support unique local requirements.
In addition to dramatically reducing shared services costs, this model provides access to talent, quality, scalability, speed, risk mitigation and the flexibility of global time zones. Sometimes called "rightshoring," this is today’s global delivery standard for shared services.
How did we get here?
The current state of globalization in shared services feels a little like the advent of shared services itself. In the ’70s and early ’80s, with the "invasion" of Japanese and other Asian competitors, Western companies adopted TQM, lean manufacturing and similar techniques to improve their core operational processes. They quickly followed with front-office initiatives like customer segmentation and profitability analysis. It wasn’t until the late ’80s and ’90s that companies turned their attention to improving administrative support processes through shared services and process re-engineering.
A similar scenario is emerging for globalization. The early focus was on front-office expansion into new markets and optimizing the global supply chain. However, the globalization of administrative support processes is a relatively recent phenomenon. The early adopters in the mid-1990s may have been trendsetters at the time, but their trendsetting model – the notion of regionally redundant service centers – was far from world class by today’s standards. American Express, for example, set up three global F&A shared services centers – one in India, one in the U.K. and one in Arizona, all exactly alike and serving their respective geographic regions. HP, meanwhile, set up similar F&A centers in Singapore, Belgium and Colorado.
But those models are now obsolete, thanks to dramatically reduced global telecommunication costs, less stringent requirements in developing countries, the emergence of BPO providers, and evolving ERP architectures that enable companies to perform work most anywhere, anytime.
And that’s precisely why those early leaders have shifted away from the old paradigm, toward a true global service delivery model. For example, HP’s rule of thumb in their regionally redundant model was that 80 percent of F&A transactional processes could be standardized globally and 15 percent regionally, while 5 percent required a local flavor. But after moving to a true global delivery model, the company found that 95 percent of the processes could be standardized globally with very small regional and local variations.
Today’s hub-and-spoke model
To determine what can be standardized for your organization, decompose your business processes into tasks and activities – and then, based on various criteria, decide the best location for the job:
- Global low-cost hubs. Use one or more global centers for rules-based, transactional activities and back-office processing – such as, in the case of accounts payable, invoice archiving or 1099 processing.
The more work you can house in this lowest-cost location, the better.
- Regional centers. Use thin nearshore centers for standard non-transactional activities or transactional activities that require more regional presence. These might include call centers requiring spoken language skills; document scanning that’s subject to local policy on data security; or tax processes subject to regional regulation.
- Local centers. While it’s most cost-effective to leave as little work as possible at the local level, some non-standard activities – such as policy design and higher-level decision-making – often must stay at an onshore location. Likewise, activities requiring heavy voice communications, local accent or strong cultural understanding are sometimes best placed closest to the end user.
Clearly, this hub-and-spoke approach is a mixed-shore model with the most effort placed on the global low-cost hub. The local and regional locations, meanwhile, are critical to the total end-to-end process, but those locations are reserved for specific competencies and unique language or statutory skills. Underscoring the hubs and spokes is the technology layer, which, since it is built into the software, is location – independent.
Add it up, and this global service delivery model not only puts the right work in the right place, it also ensures business continuity by mitigating the political and economic risks of individual locales. When it comes to choosing locations, India is no longer the only place for a low-cost hub. Considering factors such as language and accent, as well as the effect of inflation on long-term wage rates, companies can now source transactional activities from the Philippines, Malaysia, Argentina and other low-cost locations.
|Payroll: a global hub-and-spoke model|
|Say multiple sites are feeding time and attendance data into a regional service center. What happens next? A possible scenario:|
|1. First, the regional center converts the time entry into full-pay hours and performs characterization processing to add factors like shift differentials, equipment allowances or 13th months.|
|2. From there, either the regional center or a global low-cost hub runs the netting engine and assigns the offtakes to recipients such as tax authorities, employee bank accounts or benefits providers.|
|3. The global hub then streamlines the data to employee files, company gross and net payroll files, data warehouse files, and company report accumulators.|
|4. Reporting on labor-cost distribution is then routed back to the local countries or the regional center for accounting in country-specific cost centers.|
|5. Electronic funds transfer is performed from the global hub (or in the local country).|
|6. Print jobs can be queued from a global hub, while the actual printing and mailing are done locally or regionally. Overtime and special pays are approved by the Manager Self-Service application.|
Heiner Braun’s pension request
So what does global support services look like from the employee’s perspective? Consider this EMEA example. Heiner Braun has worked in your company’s Neufahrn location for 28 years, and, at 62, he is eligible to take retirement. He wants to know his pension benefit on his next birthday, as well as the survivorship options for Ilse, his wife. Heiner’s employment started in 1968 with Original GmbH, which was acquired by NeuCo in 1992, but Heiner’s pension rights were protected in the purchase. Here’s what happens:
- Employee request. Heiner initiates a pension estimate request from his desktop. At "Meine HR" on NeuCo’s HR portal, he clicks "Retirement Rewards" and selects "Obtain a Pension Estimate." The command tab requires Heiner to insert his date of birth, marital status, spouse’s name and age, and his date of first employment with NeuCo (in this case Original GmbH).
- Routes to global hub. Heiner’s request routes directly to the shared services production center in Bangalore, India. (Heiner also could have made his request by telephoning the shared services call center in Wroclaw, Poland, which has German speakers on staff.)
- Processing. When the Bangalore center gets the request, a processor promptly determines whether Heiner is truly eligible for a pension and examines his work and salary history to ensure the service center has all the information necessary to complete the calculation.
- Calculations. If these "gating criteria" or "eligibility steps" are met, the processor applies the rate tables to the salary and service history to determine the estimated base pension amount; applies the actuarial discount for survivorship for Ilse; and then loads the two calculations into a spreadsheet and e-mails it to Heiner.
- Voice support through regional center. To clarify any of Heiner or Ilse’s questions, the processor offers a phone appointment through the shared services call center in Wroclaw.
- Fulfillment. The processor in Bangalore furnishes Heiner with the pension application form, which he uses to officially notify NeuCo of his retirement and confirm the retirement date. Upon receiving this form, the processor verifies it and sends it to the pension trustees for payment. Pension payment processing is also handled in Bangalore.
In this example, the location of services was invisible to Heiner. The global hub in Bangalore processed the request and performed the pension calculations, and the regional call center in Wroclaw handled the voice interaction. The technology layer, meanwhile, enabled the self-service interface on the HR portal.
How to design a global delivery model
Generic process decomposition compass:
Accounts Payable process decomposition compass:
If that’s what global service delivery can look like, then how do you go about designing it for your shared services organization? Follow these basic steps:
- Objectives and priorities. First, determine what’s driving your move to a global model. Cost reduction? Acquisition and retention of global talent? Best-practice standardization of processes? Risk mitigation? Tax optimization? In addition, identify any known enablers or restraints – such as reading, writing and speaking skills in certain languages – that will affect your global footprint.
- Competency centers. From there, determine where to establish your process excellence leadership, which ideally comprises a single global process owner for each process area (such as accounts payable or benefits administration). Importantly, keep in mind that these global process owners don’t need to sit in the global hub. Their role is process design and improvement, not service delivery, so the process owners in a multinational company may be positioned around the world.
- In-scope processes. Next, build a comprehensive baseline of processes to include in the model. Note the headcount for each activity or task, the cost by person and location, and workload volumes and service levels. In addition, look for parts of each process that can be automated and, therefore, not subject to a geographic move.
- Process decomposition. Progressively peel back the layers of the onion to break processes into activities, which then can be earmarked for either global low-cost hubs, thin regional centers or local sites. Use location criteria to determine where the work should be performed. Does the activity have high labor content? Does it require specialized skills? Does it lend itself to simple rules? Does it require local domain knowledge? Are tasks easily documented? Is the activity highly interdependent on other processes at the same site? Does it require voice contact with customers, suppliers or business partners? After answering questions such as these, document how the process would flow in a future state.
- Business case and governance plan. Finalize your redesign with a business case that assesses the benefits, investments and risks of the new model. In addition, note that governing a global model is considerably more complex than governing a regional or country model, as global governance teams may require closer coordination across far-flung centers. Global governance also requires more sophisticated software for tracking service levels, internal charges and issue resolution, and these applications should be Web-enabled for access by the shared services centers and internal customers.
In conclusion, remember that in the early days of shared services, there were several leaders who challenged the conventional thinking and gained competitive advantage. Today, likewise, there are only a few companies that have truly globalized their support-services delivery model. Are you one of them? Or are you blindly following old practices that are past their prime? If your organization is like most, you’re under pressure to deliver quality support services at the lowest cost. If that’s the case, can you afford not to consider a global delivery model?
Case Study: Beauty products company leverages global delivery model for HR services
Profile: This client is a multibillion-dollar direct seller of beauty products. Global operations include more than 40,000 employees and 5 million independent sales associates.
Challenge: The company’s HR operations, spanning more than 60 countries, were decentralized and non-standardized. The company had little information about its employees and associates, such as how many people worked in each location or how they spent their time. In addition to improving visibility on this data, the company sought to reduce the cost of delivering HR services while aligning its HR organization to support a commercial restructuring.
- Global integrated data. To enable better decision-making, the company needed timely and accurate access to key data on all employees and associates.
- Improved HR value proposition. The HR function sought to improve its internal value proposition through better services in change management, consultation, organizational design, recruitment and talent management.
- Same or better service for associates. The company wanted to enable associates in many countries to access services 24/7 and effect transactions directly.
- Reduced costs. The company wanted to provide enhanced services at a lower cost.
Solution: An assessment evaluated the opportunities of a global service delivery model, including a hub-and-spoke approach with an integrated data warehouse, which provides a single data source for capturing employee information and supports employee self-service technology. The delivery model would serve the company’s four regions – North America, Latin America, Asia-Pacific and EMEA – through global low-cost hubs, thin regional centers and local/corporate sites.
It was important to determine which categories of HR processes were candidates for remote, centralized processing versus those requiring more regional or local presence. A sample breakdown:
A process decomposition was conducted on each of the company’s 20-plus HR processes, breaking them into individual activities which were then separated into rules-based tasks that could be standardized and centralized in the global hub, centralized in the regional spokes or moved to corporate headquarters.
The initial process decomposition of compensation administration, for example, included this partial list of activities:
|Compensation strategies and policies (i.e. cash compensation, variable pay, non-cash compensation)||Local/regional|
|Determine competitive level and mix of compensation plans to meet business goals||Local/regional|
|Design employee and management compensation programs for corporate and business units (i.e. base, bonus, incentive and commission plans)||Local/regional|
|Design executive total compensation plans||Local/regional|
|Develop compensation communication strategy and produce materials||Local/regional|
|Disseminate and route compensation communications to appropriate parties|
|Develop policies for compliance and reporting||Local/regional|
|Administer policies for compensation reporting and record-keeping||Global hub|
|Annual or periodic analysis of competitor market pay||Global hub|
|General surveys on pay practices||Global hub|
|Ad-hoc or specialized surveys for particular job positions, job families or pay practices||Global hub|
|Special surveys as required by state and federal agencies||Global hub|
|Establish policy of job evaluations and salary structures||Local/regional|
|Design job evaluation methodology, salary structure system and job profiles||Local/regional|
|Conduct job evaluations based on profiles, internal data and market data||Global hub|
|Establish budget parameters of allowable salary increases||Local/regional|
|Administer and process salary actions and incentive/bonus payments (including mass updates of salary actions and notifications to management team)||Global hub|
|Administer and process promotions and off-cycle pay adjustments||Global hub|
|Oversee and monitor execution of pay programs||Local/regional|
|Maintain records of salary and other pay-program actions||Global hub|
|Administer deferred compensation; stock options or grants; short- or long-term incentive plans; and supplemental executive retirement plans||Global hub|
|Approve compensation policy exceptions||Local/regional|
In addition, it was important to consider how the company’s various locations would use the services. All countries, for example, could take advantage of a central data warehouse showing the number of employees, compensation, benefits levels and other such information. However, some countries – namely those without access to phones or computers – wouldn’t benefit from self-service technology.
Importantly, global service delivery is about more than just moving standardized activities to a global hub. It’s about continuing to standardize processes, thereby placing more work in the lowest-cost locations. This company undertook a global standardization of two key processes: compensation planning and performance & career development planning.
The company’s resulting model distributed the HR work as follows:
- Three global low-cost hubs. The company centralized the rules-based, standardized activities in Manila, Budapest and Hortolandia, with the Manila hub serving the English-speaking countries – the U.S., Canada, U.K., Ireland, Japan, Hong Kong, Australia, New Zealand. Activities assigned to the global hubs included compensation, benefits, payroll, performance management, employee data management, employee self-service, manager direct access, call center and HRIT.
- Four regional centers. The company established regional centers for its centers of excellence, as well as higher-level issue resolution, tasks requiring spoken language capabilities, and other activities requiring regional presence.
- Local HR support. While the objective is to move the majority of the work to the hub-and-spoke facilities, the company recognized a need for local HR support in each country to train business partners and employees in the new delivery model, including new self-service technology. Since many of the HR tasks have been automated or relegated to the global hub, these local generalists can now devote more time to hiring, developing and training employees.
- Technology layer. The integrated HR technology solution includes a global data warehouse to provide headcount, compensation, benefits, training and recruiting data; a self-service, 24/7 HR portal available to all employees and 98 percent of all associates; and various tools for managers.
As a result of the new service delivery model, more than 60 percent of the administrative work that was previously done manually at a local site was instead automated or performed by a global production hub. The model has led to lower costs for HR services; standardization that eliminated duplicative processes and inconsistent treatment of employees and associates; accurate employee data that’s readily available; improved compliance; and an overall leaner, more strategic HR organization.