The Year in Review: 2008 in Shared Services and Outsourcing

It seems at the moment that there's hardly time to draw breath: the events of the last year have been so vast in impact and so profound in consequence that the repercussions continue to roll over shared services and outsourcing, and the global economy as a whole, with seismic force. Nevertheless, it's traditional at this time of year to take stock of the previous twelve months - and so here at SSON we've enlisted the help of some key players from right across the space to assess the events and trends which characterized 2008.

(For a glimpse of what's coming up next year for shared services and outsourcing, check out our "Predictions for 2009" feature...)

Helen Neale

Senior HRO Analyst and HRO Research Manager, NelsonHall

Many HR professionals will look back on 2008 as a year of significant change for HR organizations on a global basis. Companies, particularly within the financial services and construction industries, are still experiencing very difficult times, and will unquestionably do so for a prolonged period. HR organizations have been challenged to deliver significant change programs while simultaneously trying to manage the day-to-day complexities of running the HR function. As redundancies increase, and the morale and stability of the workforce’s own financial situations take a significant nose dive, HR challenges are in constant flux.

Key 2008 challenges I have identified include:

• Managing extensive exit programs while trying to keep organizations’ morale high: HR organizations have had to recognize and guard against the toll high levels of redundancy take on those remaining in the company. For example, it is critical to continuously and openly communicate with key employees during times of high redundancies to ensure that key people do not "jump ship" as the morale of those remaining is affected. Therefore, HR departments have been tasked with "keeping their heads while all about them are losing theirs". In other words, making sure remaining employees are happy and therefore productive, so it’s as close to business as usual as possible.
• Support for organizations within emerging economies: despite the difficult times in 2008, some businesses are looking to expand into countries where there are significant growth opportunities including Russia, China and Korea. Alongside the difficulties within Western economies, growth in China, for example, is still critical to the strategies of many larger organizations. In particular, companies are looking to take advantage of the incredible market for consumer products within such emerging economies. HR service delivery has, therefore, had to balance the requirements for change programs centered on employee reductions in the US and Western Europe with the need to increase HR delivery in these emerging countries. Questions these companies need to address include: do we need to engage with a preferred recruitment provider in Asia Pacific to manage employee hires in the region? Do we need to expand the HR delivery footprint to include more localized presence in some of these countries as our company footprint expands?
• Keeping costs and investment in HR low while still delivering effective service: HR can be one of the first functions to take the hit when times are tough. CFOs often look at their HR departments for operational cost savings. Therefore, HR has been under pressure to effectively deliver services with reduced resources and investment. While HR functions have seen significant redundancy levels in 2008, they are required to maintain the high levels of employee satisfaction HR directors demand. This is a major challenge to one and all, especially given low investments in HR.

Fran Morton

HR Transformation and Learning Outsourcing Consultant

Despite the gloom and doom of the second half of 2008, we saw a couple of big ideas gaining traction:

• Transformation is what's needed to get HR to the next generation. With transformation as the engine, HRIS and outsourcing take their proper places as approaches and tools to achieve the ultimate goal.
• Full HRO (done in one huge mega-bite) isn't necessarily the best answer. The rise in single or few-process outsourcing demonstrates clients "get it" that everything at once is not the only way.

Phil Searle

Founder and Managing Director, Chazey Partners

What a year! 2008 started with the global economy steadily growing and concerns with inflationary pressures, followed by fast rising oil and commodity prices, but with no hint of what was to follow. Then came the dramatic collapse in the financial sector, continuing falls in house prices, the recent sharp decline in the price of oil and now talks of deflation and even a possible return to the Great Depression. Wow! So how has all this affected shared services and BPO? What major challenges have shared services and BPO practitioners faced in 2008 and what will 2009 look like? Here are my views.

Globalization: globalization has manifested itself in many ways, including significant advancements in communications and technology, the rapid growth of new markets such as China and India, and the movement of workload, people, data and currency across the globe. Offshoring of work to other countries (either internally through captives or externally through BPO providers) has allowed companies to tap a much lower labor cost pool. Indeed, earlier in the year, the question was whether some of the new lower cost locations were overheating, which saw an expansion into even newer locations such as Vietnam and parts of Africa.

BPO continued to expand rapidly in 2008, although mainly through the signing of more selective outsourcing contracts (e.g., within specific functions such as finance and HR and then for specific activities within those functions), and less in multi-tower cross functional outsourcing deals.

Talent Management: there were concerns in 2008 over the cost, availability and quality of resources (especially people) available to shared services and outsourcers. While this is still the case in terms of quality, the recession has definitely lessened the cost and availability concerns. Nevertheless, effective talent management is critical to successful shared services and outsourcing, and more organizations have grown to recognize this in 2008.

Shared Services Value Proposition: while many in shared services understand completely the value of implementing and operating effective shared services operations, many outside of the shared services community don’t fully "get" shared services or its value proposition. I quote here from my recent interview with Michael Cox, Chief Economist at the Federal Reserve Bank of Dallas:

"Shared services is not well understood at all. The aims and methods that shared services use to deliver effective and efficient support services to businesses may be well understood but the term "shared services" is not. Say 'shared services' and my mind conjures up no instantly clear image of anything."

The Global Economy: this is, of course, the big one from 2008. The dramatic change in the economic environment has impacted everyone. Recession is with us in the West, and growth forecasts for the booming economies of China and India have been recently cut by the IMF into much lower single digits. Just in the last few weeks we have seen significant layoffs across all industries, including in shared services and outsourcing operations. Another impact of the down economy is that the previously booming expat employment experienced in developing countries has been curtailed. Furthermore, budgets have been cut or suddenly frozen, causing at least a short-term shelving of many "investment" projects which might involve some optimization around technology, shared services or business transformation.

Emer O’Kelly

Director, Triagen Ltd (formerly European Finance Director, Avid Technology Europe Ltd)

[Companies were] mainly REACTIVE to the dramatic economic downturn. They concentrated on very short-term issues and on somehow getting through 2008, and did not commit cash to projects even if they made good medium- or long-term sense.

A number of weaker companies have already failed, and they appear to be getting little sympathy from either the banks or, for that matter, other players like audit firms. Many fear there will be a second wave of failures (or near-failures) of better businesses, which cannot be allowed to go under without a fight. That will challenge the market more than letting the truly weak companies go.

George Penton

ERP Solution Management for Shared Services, SAP America

With the downturn of the global economy this year, shared services centers have been forced to react to unforeseen conditions, and have faced much greater than usual challenges in managing their credit-to-cash and procure-to-pay business processes. Ineffective management of the company’s inflow and outflow of cash, including longer collection cycles and worsening DSO can, unfortunately, be perceived as lackluster performance by the SSC. This impacts the perception of good service delivery by the SSC, especially in companies in which the SSC is not yet mature or not yet seen as a value-added business partner. Today's reality is that effective cash management is key. Companies that effectively manage the flow of cash into and out of their organizations (their financial supply chain) will be able to weather this economic storm much more effectively than companies that do not.

John Haworth

Consulting Principal, Global Sourcing, Pillsbury Winthrop Shaw Pittman LLP

A key consideration for best practice organizations is to be mindful of the effect of staff reductions on the employment brand of a company. The who, why and how of staff reductions will be observed by the retained staff, and word of the manner of these actions will find its way into the broader employment market. Capricious actions will lead to employment brand damage, while careful, well-executed, and generous separation terms will serve to maintain the employer's brand as the labor market improves. Honoring prior service, making eligibility for rehire explicit, even thinking about granting service credit for those employees who may be rehired down the road could be techniques that cost little in the here and now. These approaches could go far in making the severed employees not only think well of the employer, but also help the employer keep a pool of experienced ex-employees well disposed to potential future employment.

We see the cost argument trumping all at the moment, and large scale buyer-financed, near-term investment in service delivery improvements moving out of the picture. There are, however, providers who seem to be willing to finance or defer implementation/transition charges in order to capture (and retain) clients who fit their models well. Buyers of services need to be aware of their ability to negotiate terms and imaginative solutions with providers, rather than reverting to seemingly comfortable, but discredited, models whose optics look like pure cost take out. Since there can be no sustainable benefit from these models, buyers need to be advised to understand that investment is necessary for service delivery transformation, and that it is a question of making transitions to the new model affordable, not non-existent. This too, is a consideration for now and for 2009 at least.

Brian D. Smith

Partner and Managing Director, Financial Services, TPI

In 2008, the outsourcing market faced several challenges including portfolio optimization, attrition and rising costs in India, as well as currency fluctuations. Companies found portfolio optimization to be a challenge as they balanced onshore and offshore resources between internal and external providers, and between geographies. Due to attrition and rising costs in the FS "primary" back-office offshore environment – India – many considered alternative countries. In addition, currency fluctuations, particularly the drop in the value of the dollar relative to the rupee and the euro, impacted the business cases for new offshore initiatives, and in some cases made existing arrangements uneconomical for the buyer, for the seller, or for both.

Phil King

Associate Partner/Shared Services Solution Leader, Atos Consulting

Starting up shared services is an enormous challenge at the best of times. Faced with the rapidly changing economic and political landscape of 2008 and looking forward to an uncertain 2009 makes it even harder. On the other hand, the drivers for shared services – and doing it right – are made stronger.

So what were three key challenges and trends I observed in 2008? The first and foremost, which I wrote about in November, has been getting approval for a business case for start-up in challenging economic times, when every investment will be scrutinized in detail for payback and ROI by any board and/or executive team, and risky projects will be avoided. So for those presenting a business case, it has been, and continues to be, important to look for value-added benefits. Headcount savings and efficiency benefits are necessary, but the best cases have also stressed improved controls, working capital benefits, and support for wider transformation of support functions such as finance, HR and IT. As well as a strong benefits case, approvers will also be looking for a tightly run project with well documented and managed risks. Over the years there have been many shared services lessons learned, and in tough times it will be even more important for start-ups to take heed.

The second challenge I have seen is that shared services is moving from the former domain of large multinationals and big public sector organizations, with support staffs running into the thousands, to become a consideration for smaller businesses and government bodies. For example, a mid-cap company that has rapidly expanded into several countries may see shared services as an attractive opportunity to gain control and prevent a proliferation of processes and duplication of activities before it becomes a much larger problem. However, in this case, it may not be as simple to create economies of scale, particularly if several languages need to be catered for. On the other hand, the benefit gained by creating shared services is that at least some critical mass is achieved, reducing the exposure that comes from having relatively small in-country staffs. The key here is creative design. It is important that systems and processes are as effective as possible, and designed in detail, that the organization can be flexible and that language requirements are reduced through automation.

A third and interesting trend is that shared services is increasingly moving beyond finance functions. We have seen HR adoption over the past few years, but in 2008 I have, for the first time, seen successful shared services implementations in customer service and order fulfillment. It seems ironic that concepts of customer service would be transferred from finance into front-office functions, but it has been effective. I can see this as a future trend as, more often than not, customer order management has been kept as a local in-country or business unit function due to its heritage of being based on local market relationships. However, as more and more companies globalize or address their markets at least on a regional basis, and supply chains are more centralized, the case for sharing customer service across geographies is enhanced. The challenge for start-ups here is that they are "front-office", potentially more politically sensitive, and any implementation problems can directly affect the core business. So extra attention must be paid to change management activities and making sure the new shared services unit will deliver good service right from the start.

Ray Matteson

Director of Learning Operations, Raytheon Professional Services

Training providers are having to demonstrate the same or higher levels of value while operating under an extreme cost cutting environment.

Buyers are needing to build the business case and demonstrate the value of an outsourcing relationship while providers are constructing solutions that transform an organization and reduce costs amidst economic climate pressures.

The economic times are also forcing companies to truly focus on their core competencies. They now look beyond just the traditional training services and investigate the other services that support training (e.g., education assistance, customer support, supply chain, consulting, etc.).

Chris Nuttall

Partner in PA Consulting and a Leader of PA’s Management Group for Sourcing and Shared Services

Key challenges in 2008:

Customer focus/service challenges: Many shared services organizations face significant challenges in maintaining an appropriate focus on the customer, especially managing customer expectations and service. Customer surveys often fail to pinpoint key pain points, and customer sophistication is increasing, faster, in some cases, than the shared services organization can manage. Many service providers have grown too fast and struggle to maintain customer service standards. Customers have not always been as vigilant as they should be in managing to agreed service levels.

Financial challenges: Cash flow challenges – operating, investing and financing – remain front of mind, especially defining appropriate levels and timing of desired cash flows and managing the right mix of operating and investing cash flows. Budgets have been cut, and the key challenge is not just managing with less cash but balancing cash inflows and outflows effectively.

Capability challenges: Managing shared services and outsourced organizations requires specialist skills, knowledge and experience. Many organizations struggle to identify the right talent, and/or under-invest in training and development to create a high performance team of skilled, experienced and motivated people with up-to-date knowledge and the right capabilities. Many providers face resource and skill crunches, and continue to experience capability churn, exacerbated by high wage inflation.
Knowledge management challenges. Long-term shared services arrangements and outsourcing contracts can result in a loss of institutional knowledge…buyers may lose it, and providers may not share it. This can erode customers’ and providers’ abilities to effectively manage their relationships.

Market challenges: As the number of large service providers decreases, market power is shifting to the largest service providers. In addition, a proliferation of smaller, viable, providers is creating challenges around provider discovery, or how to find the best providers, and governance, or how to manage multiple providers for an end-to-end process.

Governance and team-working challenges: In a single-provider environment, it is straightforward to identify the responsibility for a service outage, process deficiency or software bug. But in a multi-provider environment, this becomes very challenging. Many customers and providers have difficulty in teaming and developing appropriate inter-relationships and levels of trust that deliver a joint business outcome.

Enterprise-wide and portfolio challenges: Executive management teams can be uninterested in shared services and outsourcing, especially as they may not understand the enterprise benefits, costs and risks or alignment to strategy. Many initiatives continue to be managed as one-off arrangements, rather than as part of a broader portfolio approach, resulting in lost synergies and the take-on of unnecessary operational risk.

Craig Ackerman

Vice President, Shared Services, HMSHost

Challenges included:

Keeping vendors to schedule on automation deliverables. Our approach: use a PMO-driven process; meet frequently, reviewing progress and issues; over-communicate expectations; and commit additional resources as needed to stay on schedule.

Competing for scarce internal resources. Our approach: review projects and priorities quarterly; maintain internal project management and technical teams; and use a structured and disciplined approach to project management.

Improving working capital in a down market. Our approach: implement and communicate tighter receivables processes and procedures; standardize vendor terms; and study the feasibility of supply chain financing.

Venkat Gopal

IT Outsourcing Advisory Consultant

Financial Challenges: Under the current economic situation, the pressure to manage cost and cash flow is extremely heightened, seizing a major part of business management’s bandwidth. But companies still need to run their businesses and their insatiable appetite to see external service providers do even more on this front is understandable. Providers have had to constantly and periodically present to the customer’s management how they have efficiently managed their 3 Ps – people, processes and pricing – by leveraging the benefits of traditional offshoring services. Customers are now also expecting providers to help them further stretch their budgets by enabling them to leverage more from process reengineering and global shared services centers. The centralization of back-office tasks can lead to significant cost savings from economies of scale, improved utilization and standardization. Process reengineering delivers the greatest cost savings and thus plays a pivotal role in the success or failure of a shared services strategy. It impacts the core of an enterprise’s functions and, as such, customers expect service providers to put their skin in the game by being open to embrace contractual terms embedded with higher risk-to-reward ratios.

Knowledge Management Challenges: Most service providers have traditionally underestimated the value derived from improved knowledge management and, hence, have been torpid in making the required investments in this area. However, successful service providers have leveraged this to their complete advantage and have reaped the benefits from harnessing their knowledge management strategy by forming deep and mutually beneficial alliances with universities, centers of learning, industry bodies and thought leaders. Some of the successful service providers have also tapped, on a global basis, experienced and retired domain and process experts for specific contributions. Service providers should build a panel of such individuals for idea generation and knowledge management.

Market Challenges: It has been observed over the past few years that engaging a large service provider is not necessarily the only answer to a successful outsourcing relationship. Recently, we have seen contract sizes become smaller and shorter in duration. Simultaneously, the scenario that is emerging is leading toward the proliferation of many specialized shared services and outsourcing firms that are much smaller in size and have deep industry domain experience, process knowledge, configurable solutions/intellectual property and tools that provide a jump-start to address the challenges faced by the customer. The traditional approach to provider discovery may not be ideally suited for identifying, rating and qualifying such specialized service providers. Thus, customers need to equip themselves differently and adopt a completely different approach to provider discovery.

Want to have your say? Why not email the editor with your own thoughts on what made 2008 such a momentous year for shared services and outsourcing?

Meanwhile, for more insights into 2008's developments, check out our December eAlerts: Finance; HR; Mature; and Start-Up.