What’s next for Shared Services?

Posted: 07/09/2012

Today I would like to discuss what’ next for shared services. Over the last couple of days I have been talking to friends and some of the attendants here and I think people make different choices, in terms of shared services implementation. Some of them are considering the shared services journey, some of them are implementing shared service centers, and some have been operating a shared services centre for the last couple of years. And the typical question that some people ask is "OK, we have done some shared service implementation…so, what’s next?"

Now what we are going to cover today is what is next; it is good to understand where we are now and then we can take a look at where shared services is heading. So, first a look at shared services based on some of the findings that we got in the latest Deloitte’s Global Shared Services Survey 2009. In the survey, we talked to some of the shared service leaders and CFOs to understand what they are doing now and what they are thinking in doing next. So, if you are thinking about what to do next for your shared service centre, then hopefully this will give you some ideas about some of the other things that you can consider doing for your shared services journey.
If you look at the economic situation for the last twelve to eighteen months, it was a rather difficult period. You may see from the IMF economic estimates at the beginning of 2008; they estimated good growth for 2008 and potentially 2009, but as we know things turned quite bad in 2009. The business climate is bad; companies are cutting costs and tightening their cash positions. The interesting thing is that although the economy is not that good, this is when shared services shine. During the good times, it is quite challenging to convey a cost reduction message for moving people and processes offshore. This message is easier to get across during an economic downturn. You may see from the slide that cost reduction is considered the top priority for shared services leaders in the next 2 years. The next priority is naturally process efficiency; which if you look at it, it will drive cost reduction as well. The top two priorities focus more on cost. The third priority is on customer satisfaction, which is often expected - so it is quite consistent with the current economic climate.

We also asked shared services leaders about the actual productivity improvement that their shared services centers achieved after the first 12 months (i.e. after the stabilization period). On average, shared services centers delivered an 8% productivity gain every year (i.e. day in and day out, shared services centers were saving 8% of their costs yearly). And if you look at it more broadly, some of them are doing better. About 72% of them can actually achieve 5% or more productivity improvement every year. Some even can achieve more than 15% annual productivity gain. So, the reality is that most of the shared services centers are actually delivering cost and productivity improvements to the business today.

What are the usual functions which are included in a shared services centre? More than 90% SSCs included finance, by IT and "others". I will cover the "others" category a little bit later in this presentation, but the "others" category is actually getting more popular. The next two are HR and procurement. If you have already implemented finance processes in your SSC, the next ones to be considered are IT, HR and Procurement.
Now looking at finance first, in our survey, we asked what business processes are being delivered in the shared service centre. If you look at the list, and for those that have a finance shared service centre, it is quite typical for them to include accounts payable, general accounting, and travel and expenses in their centers. The interesting thing is that if you look at the top ten processes in the list, all of them are transaction processing in nature; none of them are so called "high value-added" processes, in terms of adding to the business partnership of the business. The first high value-added process that you can find is number eleven, which is the "reporting and analysis" process. So, like it or not, most of the shared services organizations, although they say that we are moving up the value chain in terms of delivering higher value services - the top ten finance processes are still focusing on transactional processing.

Where we are today is still primarily transactional processing type of activities. An interesting observation is that now people are putting a lot more processes in customer support / call centre, facility management and claim processing, and some of the other processes, into their shared service centre. You can see from the slide that some of the processes have increased by more than 100% increase during the last couple of years in terms of moving to shared service centre. We are seeing that because of the economic downturn, companies are moving non-back-office processes into the shared service centre. Some of the middle-office and front-office processes have been moved to shared services centers for reducing cost and improving efficiency.

Another interesting observation is that traditionally a shared service centre is considered an administrative supporter. If you ask them about the possible impacts that a shared services centre can make on the business, then the top three that you can find are process efficiency, cost reduction and process quality. This is a trend that is changing. Shared service centers are now expected to deliver some sorts of consultancy services too. One thing that we found attractive especially in this year’s survey, and also the last couple of days when we talked to people, is that people value SSCs for their capability in providing data visibility to the business. If you were not in a Shared Services environment, and you were operating in different ERP systems, or different set of processes and systems, or in some cases even different policies, it is quite difficult for you to, say, get a report to understand what the company is doing in Asia Pacific in general (for example, spend control analysis). You may have to go back and talk to each of the country, and then find out the spending for each country and consolidate them at the end. The implementation of shared service facilitates the data standardization, and also the visibilities of data across the geography that you are building the shared services. So this enables the shared service centre to actually move up the value chain and becomes a strategic enabler.

If you scan down the list, SSCs also provide a platform to support growth. Although our economy is encountering a downturn, companies are still activating engaging in M&A (merger & acquisition) activities. A shared service centre is a good enabler for executing M&A transactions, because when you are buying a company, the best way for you to integrate the two businesses is to move some of the back-office work into the shared service centre - so you can see that "platform to support growth" is quite high up in the list as well.
Then you see further down the list that there is ‘developing new talent’, which is another topic that I will cover later in the presentation. For now, we have talked about not only the traditional process efficiency and cost reduction. We have also talked about how to make better use of the data visibility, how to support the business growth, and how to develop the talent in the organization. These are some of the changes of the value proposition for SSC over the last couple of years.

In summary, you can see cost reduction and process improvement are still the top priorities for SSC, and finance processes are still the most popular in terms of SSC process scope. Shared services centers excel not only in administrative support, but also becomes a growth enabler as well. This is where we are in terms of shared service development.

I am going to talk about the shared services trend that we have seen in the last couple of years. Let’s start with the geographic trend. One interesting thing that you often hear people talking is about offshoring to another location because of lower labor cost. However, you can see from the slide that labor quality and availability have outranked labor cost as the key factors in selecting a SSC location. Labor quality and availability were ranked first and second, with labor cost only ranked fourth in the list. Proximity to operations had moved up and was ranked third. Companies have been considering whether they should go for "greenfield" vs. "brownfield" when they pick their SSC location. You can see that companies are now prioritizing "proximity to operations" as it is higher on the agenda in their selection criteria, meaning that companies are less favorable to SSC location where they do not have business operations. One of the potential reasons is that if you were to move up the value chain to deliver high value added services such as business partnership, in most cases you would probably have to get closer to your customer internally. So the consideration that whether you have operations in the SSC location is getting more important. You can see that when companies select a shared service location, they are not only considering costs but also what you can deliver with each of the FTE in that location.

The next slide is a bit more complex. On the left hand side, we asked the respondents if their company is likely to relocate their shared service centre to another location. On the right hand side, we asked them if they were to move the SSC to another location, what the main reasons for doing so would be. You can see that 34% percent of the companies were considering moving their shared services centre to another location. The interesting thing is that companies initially believe that cost is not a primary consideration, but the primary reason for relocating the shared service centre is also about cost reduction. Our view is that when companies have implemented a shared services centre with reasonably good quality and availability of labor, they would then move on to optimize the cost structure. You might have heard during the last couple of years about pretty high cost escalation in some of the cities in India and China. Some companies, a few years after moving some of their operations to a SSC, may find that the cost has gone up too quickly. They will then need to consider moving to a cheaper location. For the last couple of years, we have seen some of the shared services centers in China and India relocate to the Philippines due to lower costs.

The other trend that we found from the survey is that as SSCs take on more advisory processes and increase their focus on customer service, proximity to operations has become an increasingly important factor when choosing a location. You may use a lot of different technologies to communicate with your colleagues; for example, telephone calls, email. However, if you are in an advisory role to the business, in a lot of situations it will be much more effective to talk to your internal customers face-to-face.

Another geographic trend is that more organizations are using a "hub-and-spoke" global service delivery model, where a single global centre consolidates location-agnostic transactional processes while regional centers ("spokes") deliver location-specific and language-dependent services. For example, some companies have moved high volume transaction processing to a regional centre in India, but they keep their language dependent process such as accounts receivable and collection in each of the countries they operate in.
We are also seeing that India is still the leading country for a SSC in Asia Pacific, followed by China. However, escalating costs and competition for talent are driving a growing number of organizations to establish / relocate their SSCs to countries such as Philippines and Malaysia.

Regarding organization trends for shared services, we have seen more organizations appointing a VP of Shared Services to take charge of the overall responsibility for the SSCs, as SSCs continue to expand in scope and geographic coverage. In our survey, 17% of companies already appointed a VP of Shared Services to manage the SSCs. For those organizations that do not have this VP role, the CFO continues to be the more likely C-level executive in charge of the SSCs, followed by CIO. The reason for a Shared Services VP role is because companies are putting more functions into the SSCs. So, it is no longer practical for senior executives to manage the SSC on part-time basis.

The second organization trend for shared services is that as the roles of SSC expand, there are increased challenges in maintaining service levels and quality. 72% of the respondents found it challenging to maintain high service levels. And more than 70% of the respondents found it challenging in maintaining service quality and efficiency.

The positive trend on the organization front is that shared services centers are emerging as a key talent sourcing and development tool. More SSC employees eventually transfer into the business. In the survey, 64% of the respondents have seen SSC employees moving to positions in the business. The implication of this movement is that you can only do that when the SSC staff is on your payroll, not the outsourcing company’s. This is an important consideration when companies are tossing between a captive versus an outsourcing shared services operating model.

We have also seen a number of service scope trends in shared services. The first one is how SSCs are expanding their service scope. The most popular one is an increase in the number of transactional processes, followed by an increase in the number of internal location servers, and an increase in the number of advisory services. There are usually 3 approaches in expanding the scale of the SSC and moving up the value chain; first is to expand the functional coverage, by expanding from finance to IT, HR and procurement. Second is to expand the geographical coverage, from a national centre to support the region and then the globe. The third approach is to expand the nature of services, from transactional processing to performance analytics and reporting, to decision support and business strategy.

Shared services centers have also started to deliver financial reporting and analysis, business intelligence and analytics, and spend analysis to the business. For the last couple of years, there has been substantial growth for organizations to add these services into their SSC. You can see from the slide that the growth was 30%, 86% and 56% respectively. The last service scope trend is the addition of IFRS support as a service in the SSC. 85% of the respondents were with a view that IFRS should either be driven or supported in the SSC.

Conclusion

I would like to share with you a few concluding thought from today’s presentation. Firstly, for all its challenges, the economic downturn has helped shared services much more than it has hurt. The downturn is driving both new customers and new services to the Shared Services Centers. Secondly, organizations are looking deeper into not only cost but also productivity in considering a SSC location. Labor quality and availability quality are now the top factors in selecting a SSC location. Thirdly, organizations are expanding the scope and reach of their shared services centers. SSCs are moving up the value chain and providing advisory processes. More SSCs have started to deliver financial reporting & analysis, business intelligence & analytics, and spend analysis to the business. Finally, SSCs are also emerging as a key talent sourcing and development tool. More SSC employees eventually transfer into the business.

I hope that you find these observations useful. Thanks.

Posted: 07/09/2012

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