Integrated Business Solutions: the Motor to Drive German Business Forward?
"Very extensive report with a lot of good thoughts reflecting the German market and its outlook for global business services."
Kathie Schoenleben, GPS Country Leader Germany, IBM Global Process Services
"I am impressed with this really good analysis of the current status of Shared Services in Germany and other European companies. The information given is very interesting for the whole SSC community in Europe."
Lars Hölzer, Daimler Group Services Berlin GmbH
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An assessment of integrated business services in one of Europe’s most promising markets – many companies are focusing on core capabilities and rethinking how their support services fit into the equation.
While organisations world-wide are wrestling with getting their businesses in order, and increasingly relying on a strong services support system to do so, the German market has been slower in taking up this option. But change is on the horizon.
The overriding driver for organisations across the world today is delivery effectiveness, or operational excellence. This idea of working not just cheaper, as was the vogue of the late nineties, but smarter, is the driver behind so many shared services models currently evolving. So while cost is the reason many embark on this journey, value is what’s keeping them going. We see this most aggressively demonstrated in industries that have been impacted by regulatory changes or financing challenges, where organisations need to save money fast, and are reacting by reprioritizing business services solutions.
A push for Harmonisation in a Fragmented World
To understand why there is so much focus on harmonisation and standardisation today, we need to reflect back a few decades, when, worldwide, companies were aggressively moving into new markets. This growth period saw many companies opening international subsidiaries, and setting up new operations with their own production processes in each country. The pattern was replicated around the world, and made more complex through ensuing acquisitions. Fast-forward a decade or so, and what resulted was an unmanageable, locally oriented operation that thrived on decentralisation and bred complexity. While markets were still returning growth, it was easy to ignore the growing internal disharmony, but the crisis of 2008 exposed the fragile systems within.
The challenge that organisations have been dealing with for the past five years has been to introduce some form of harmonisation into their global operations, and make the unmanageable, more manageable. This, in effect, is the common denominator running through much of today's push for integrated business services. And as business recovers, especially where driven by strong export growth to China and the US, we are also seeing more shared services leveraged to provide a platform for growth.
The German economy is characterized by large numbers of mid-sized companies with fairly decentralised structures or strong segment towers. In environments like this, shared services can struggle to be entrusted with the scope required to perform well, i.e., to provide more value, without a strong mandate from the executive.
And while some sectors, like energy, are driven to more holistic service integrations through the impact of policy decisions, requiring immediate action to stem costs, others are notably lagging behind. Despite the fact that Germany today represents one of the biggest shared services and BPO industry growth markets in Europe, German businesses are challenged as a result of some unique dynamics:
- the strong power of works councils limits a company’s ability to relocate jobs, and therefore offers little flexibility in reallocating resources, especially as any changes that might be brought about will require time
- the traditional management culture in Germany is marked by a preference for steering operations from headquarters; is not comfortable with outsourcing given concerns over loss of control and quality; is concerned with perceived image; is fairly restricted by siloed business structures that do not relish the idea of giving up control; and lists quality and control high on its list of priorities
- a preference for native speakers means that resources cannot easily be supplied from nearshore or offshore, especially where customer service is concerned.
The combination of these factors limits the adoption of innovative business services solutions that would provide more standardized processes and lower cost. The incentives are fairly compelling, however: According to Tom Bangemann from The Hackett Group, finance costs in DACH countries (Germany, Austria, and Switzerland) remain more than 60% above those of world-class organisations, which he attributes to higher labour costs (German companies tend to have a larger workforce in Finance than Hackett’s "world-class" companies) as well as lower levels of automation (German companies’ AP processes are only 27% automated compared to 60% automation within Hackett’s list of "world-class" companies). [see Figure 1]
Are Integrated Business Services the Solution?
Much of the discussion around shared services opportunities today centres on Global Business Services – the Holy Grail of services support, and perhaps one of the most misunderstood and ill-defined models of our time.
Companies like Siemens, Daimler, Lufthansa, and Swiss Re. have grasped the strategic value of leveraging offshore captive centres in support of greater process and data harmonisation. Lufthansa, for example, has been fairly public about revamping its operations, and is leveraging its four global "Airline Accounting Centres" in Cologne, Krakow, Bangkok, and Mexico. Daimler runs centres in the Philippines and Madrid, and Siemens has five global hubs, supported by local operations, primarily in HR. But for every one such example, there are two that have not yet taken that step. SSON’s onsite poll at the 2012 Shared Services & Outsourcing Woche, for example, indicated that only 30% of those present were running, or planning to run, global service networks, while 40% used shared services for in-country activities only, and 25% delivered services regionally.
If, despite the limitations discussed earlier, a significant percentage of Germany’s larger organizations have already moved to global business services, that is good news. What's driving German organisations towards a global delivery platform is cost, standardisation of process, and quality. And while a GBS solution checks off the cost and quality requirements, it also offers what many practitioners we spoke to consider "the only truly reliable base for continuous improvement."
However you choose to define it, GBS alone is only part of the solution. What will have a much further-reaching impact on the health and agility of German businesses is the adoption of a concept that links business services to global operations, end-to-end, and top to bottom. It's this global services context that holds the key to operational transparency, leveraging of scale, and better penetration of existing markets as well as successful ventures into new ones. However, the radical overhaul of organisational structures this implies won’t happen overnight. So, what can be done in the meantime?
Building on Business Services
There are a number of opportunities that present themselves.
In its simplest form, the responsibility of a shared services leader is to recognize and react to opportunities for growth, innovation and strategic value. According to Maximilian Thomiak, Managing Director of Accenture GmbHand head of the Integrated Business Services Practice for Germany, Switzerland and Austria (he is also a veteran of Hackett), those companies that have understood the value of, and have committed to, integrated business services are a whole step closer to getting there. However, for most companies this is a two-, sometimes three-stage journey.
Most of today’s research institutions will quote a high percentage of companies currently operating multi-functional shared services. Hackett's most recent data indicates that approximately 73% of worldwide entities have moved in that direction. Though we may quibble about what exactly defines multi-functional (there are as many shades of "multiple" as there are "functions"), what's certain is that most companies have recognised that where one function for shared services is good — more functions are better.
A poll taken at SSON’s German conference last year indicated that multi-functional centres are on the rise. Of the companies surveyed on-site, 30% included Finance and Accounting activities in their SSO, 11% included IT, 9% included control activities, 27% included HR administration, and 15% included Procurement. And while, of the early adopters, 11% are currently re-evaluating a move to multi-functional, of those who have more recently moved to shared services, 20% are already considering expanding the scope to multi-functional.
Again: we may argue about definitions, but the trend is clear. Multi-functional models are going to become more familiar in the German services landscape. Scale and size of operations is a key factor supporting this trend, as is increasing familiarity with the shared services model. Of those not currently pursuing a multi-functional approach, most fall into the category of being hampered by organisational rigidity, turf wars, or other political concerns. In some cases, these are still proving to be fairly insurmountable barriers.
While this type of protectionism against new services delivery models is still strong within Germany, many practitioners believe that new markets, like Asia, or new segments, like e-commerce, will offer an opportunity for these barriers to drop away.
2: Globalised services
The strategy that currently tends to be the most popular for German companies is to consider global services delivery for US, Latin American, and Asian markets, but to keep the German market, as well as a few other continental European ones, closer to HQ. That at least, is how Lars Hölzer, Head of Daimler Shared Services Centre in Berlin sees it. Having designed and launched Daimler’s German SSC activities back in 2007, Mr. Hölzer, with seven years now under his belt, is one of the country’s foremost shared services practitioners. Based at Daimler’s Berlin centre, he explains: "Most German multinationals have, sooner or later, come up against limitations when deploying German managers into US or Asian operations. It’s in these markets, therefore, that outsourcing may most likely take a foothold."
Daimler runs three global hubs: one in Berlin, one in Madrid, and an Asian centre in the Philippines. Between them, these centres carve up accounting services for Daimler’s worldwide operations. The decision as to which businesses are served from which hub is not necessarily geographic, explains Hölzer. Rather, services are supplied based on divisional, geographic, and process classifications. So, for example, the Philippines are serving sales companies in APAC and production and sales companies in America and Latin America. Moreover they are developing into a global backoffice location for suitable services for the entire Daimler organisation. The German centre in Berlin is servicing Accounting, HR, Controlling or IT services for the German and Hungarian region, and Madrid supports the European sales companies with Accounting services. Madrid was the first centre to go live in 2007 – in response to the crisis that hit the auto industry back in 2005, and which required some speedy reactions on the part of car companies. What drove Daimler to leverage an Iberian hub, however, was not cost arbitrage, Hölzer explains, but quality concerns.
"The Madrid centre processes financial statements for some of Daimler’s biggest divisions, and as such it has also taken up the mantle of preserving Daimler’s reputation for first class reporting," he says. The company is well known for the excellence of its financial reports, and maintaining, even raising, this quality standard was a top priority for the entire group. As such, Madrid’s workforce is a perfect match, says Hölzer.
4: Selective outsourcing
With the German market having taken up shared services somewhat late in the game, today’s most mature centres are about a decade old. Many would, at this stage, be ripe for outsourcing, or at least offshoring. The reality, however, is that the country’s strict works councils rule out the flexibility needed to make such decisions. And with many German companies having set up centres in major cities such as Cologne, Munich, or Berlin, relocating would certainly offer some opportunities for arbitrage.
"Organisations are increasingly looking for ways to expand and improve shared services but they want to build on their accomplishments and infrastructure," explains Kathie Sch÷nleben, IBM’s GPS Country Leader in Germany. "Outsourcing is an option that is being considering with increasing intensity – to draw on the capabilities of outsourcers in a complementary way. This might mean leveraging a specifically strong capability or the global reach or the proven platform of a provider."
Stephan Fricke, of the German Outsourcing Association, agrees that outsourcing is a tough sell in-country, and quotes a recent GapGemini study, which concludes that only 5% of German companies outsource directly.Times are changing, however, and with the economic environment still a challenge, more companies are focusing on their core competencies, and considering creative partnership arrangements with third parties that offer advantages in technology, analytics, or services. It’s an opportune moment for organisations to consider their own strengths vs. a provider’s strengths. For example, it’s in specialist areas like collections, or recruiting-as-a-service, that many believe we’ll see the initial forays into outsourcing, as providers leverage their expertise and investments.
Another factor that may fuel more outsourcing activity is expansion into new, lucrative markets like Asia, or Latin America, where the infrastructure is not yet developed and an organisation may have more flexibility to manoeuvre. However, not all people agree on this point. Daimler’s Hölzer believes that when it comes to Greenfield markets, the need for a strong relationships and control outweighs the benefits of easier access through third-party providers. This means that companies like Daimler will still prefer to move into new markets through captive centres, leveraging their own, experienced management, despite the additional cost of expats. On the other hand, when it comes to growing in existing markets, where concepts are well established and flexibility is a key variable, outsourcing may be considered an increasingly attractive option, Hölzer believes.
"Areas like data entry or invoice handling, for example, could easily be passed onto a provider, though again, I think a strong incountry presence would be a requirement."
Before outsourcing becomes an accepted business practice, however, companies will first have to convince their boards and shareholders that handing over a part of the business to outside providers, especially offshore, does not mean relinquishing control. Providers could meet these concerns halfway by building up strong delivery centres in Germany, which could or could not leverage a global footprint. Daimler’s Hölzer believes that if the likes of Accenture or Genpact were to make a bigger commitment to the German market by building up in-country operations, it would translate into greater confidence on the part of would-be customers to test the model. "I think, right now, we still don’t have enough serious in-country representation of some of the bigger, more mature provider companies," he explains. "If BPO providers invested in big German hubs I believe that would go some way to gaining the confidence of German companies."
This is backed up by a 2011 Germany Trade and Invest report1, which emphasises the fragmented nature of the German BPO market. According to this report, the top 20 BPO providers occupy less than 30% of the market. And while the report quotes front and middle office services as dominating, it foresees "the largest growth potential" for the back office. German based analyst firm PAC concurs, forecasting the German BPO market to grow by more than 10% annually, from 2014, with HR and F&A leading the way.2
Hewlett-Packard BPO’s acquisition of German company SCHOTT’s financial shared services may be an arbiter of what is to come. Having thus established an in-country BPO presence, HP is able to leverage a global name with native knowhow.
Another option for strengthening confidence in the BPO model would be for providers to first develop relationships with the American, Latin American, or Asian operations of German companies, and prove themselves in those regions. "That might," says Hölzer, "create a trickle-back effect for the continental market."
5: Greenfield segments offer opportunities
Where we do see a more forward thinking approach is in Greenfield areas, for example e-commerce. This represents a growing market for IBM and other providers, and it is here that German multinationals are showing more interest in partnering for globalized services delivery of back office support functions. Germany’s retail industry, for example, is showing significant interest in partnering with software and service experts to launch themselves onto the digital wave. The digital sector presents a good opportunity to partner with a provider who has built up considerable expertise in e-commerce, while there are none of the traditional hurdles to overcome (existing workforce or infrastructure) that would counter outsourcing as an option.
6: MidCap market shows flexibility
The relatively enthusiastic take-up of multi-functional solutions by the Mid-Cap market (€3-€5 billion in annual revenue, generally operating across 30-50 countries), where single function services tend not to work on a global scale because of the sub-scale operations in smaller markets is a notable highlight in an otherwise fairly stable landscape. "While single-functions faces scale challenges, a multi-functional, platform-based approach works, and supports growth by enabling an end-to-end perspective across the business, including integrated back-office solutions covering 80% to 90% of the markets," says Max Thomiak. As a result, the MidCap represents a very interesting market for firms like Accenture.
Moving to multi-functional from the start overcomes the scale issue, while at the same time, allowing these companies to leapfrog across the kind of structural complexities that have hindered those that have gone before. MidCap companies are thus finding themselves able to realise the value of integrated business services sooner, by developing growth strategies aligned with the kind of integrated support services that many of the more traditionally structured companies can only dream of. As ever, it’s easier to build something right from the start than break it down and rebuild later, when turf wars may present formidable barriers.
The fact that this segment is, collectively, large in scale (indeed, it represents the majority of Germany's market) means that what starts as a trickle may rapidly turn into a flood, especially as practitioners like Thomiak see it as a market with "enormous growth potential," and most companies recognise the complexity trap of continued, fragmented growth. "These organisations have the opportunity to build strategic, scalable business service capabilities," explains Thomiak, "and are frequently more open to pragmatic partnership models, particularly when it comes to international expansions, where a provider’s expertise and scale can be leveraged to good effect."
What is also significant is that this kind of partnering can help companies in maintaining a higher margin to revenue proportion than is seen across other sectors, and so directly affects the bottom line.
7: Asian growth provides an opening
Most companies have recognised the value of a scalable platform for spearheading growth into the lucrative Asian market. And while countries like China offer a significant enough scale to warrant investing in a standalone office (this may, in fact, be the best way to deal with the market’s idiosyncrasies), this isn't the case for most countries across Asia. Multinationals have had to do some creative rethinking when it comes to this region. Ten years ago, companies were moving to Asia for cost reasons; today it’s a growth market and the same companies are now transitioning capabilities there to supply their new customers.
Asian-based centres are providing a number of DACH-based organisations with an advantage in facilitating growth across Asia. It’s not reasonable to set up shop in each new country, and in any case, apart from costs and complexity the requisite skill base is oftentimes not present at the local levels. Instead, some organisations are developing their Asian centres into somewhat of a talent incubator for their regional operations, leveraging the training and on the ground capability that has been built up and deploying this as needed to in-country operations.
The German business landscape, though traditionally fairly rigid, is starting to open up. Fuelled by growth in US, Asian and Latin American markets, it is showing signs that its MidCap market may follow the path trodden by leaders like Lufthansa, Daimler and Siemens a decade earlier in leveraging global centres for growth and better harmonisation of business processes. This is particularly significant as the MidCap represents a large proportion of the German economic landscape, and is expected to grow strongly in the medium term. Indications are that many of these organisations will leapfrog straight into multi-functional shared services, supported by providers with proven industry expertise.
Perhaps what best summarises the moment is Thyssen Krupp’s recent recruitment of Lars Hölzer. His newly created role, into which he steps this November, is Head of Global Shared Services. It’s notable because Thyssen Krupp does not currently run a shared services, and as such marks the company’s commitment to a multi-functional, global model from the start. Hölzer’s brief is to build up and run a worldwide multi-functional shared services centre, to cover Accounting, HR, IT, and Real Estate.
"It's the first instance of a German company launching and implementing shared services within a multi-functional, global framework from the start. So I think that is pretty significant for what it says about the opportunities this model presents," says Hölzer. And as another indicator of future developments, Hölzer’s vision extends to building a number of global hubs, and tends towards outsourcing for US, South America, and Asia. And while Hölzer’s appointment reflects the recognition that what was needed was someone with a natural cultural affinity to understanding the workings of the domestic market, it also reflects the recognition that to be world-class today requires an understanding of how global resources can come together.
The fragmented operations resulting from late twentieth-century growth have created significant inefficiencies, which were brought under a spotlight during the financial crisis gripping markets five years ago. The future ideal is now defined as operating more effectively, and holistically, as an organisation. This suggests two things for German companies: first, the need to integrate existing shared services to avoid redundant processes; and second, the development of an integrated business services perspective to create value, and rationalise management complexity.
Shared services today is differentiated from its past incarnation, where the idea was to consolidate in the cheapest place and relocate as many jobs there as possible. Now, the value lies in adding processors and leveraging a differentiated business model.
Whether the German market is ready for that step remains to be seen, but the moment is certainly ripe to ride the wave to recovery, while focusing on strong margins in growth, as well as existing markets, as these recover. A global delivery platform would provide the kind of infrastructure that many, predominantly Anglo-Saxon operations have already been leveraging. And while the German economy, like many of its continental neighbours, is not yet ready to fall in behind a global rollout, limited as it is by workforce regulations and management traditions, testing outsourcing relationships in the expansion of existing markets, or by leveraging provider’s infrastructures in growth markets, may be a first step towards a more integrated business services model.
It’s a market in transition, whose progress we’ll be following closely.
1. The Shared Services and BPO Industry in Germany, 2010/2011, Germany Trade & Invest
2. Industry Overview: Business Services in Germany2013/2014, Germany Trade & Invest
Note: "While global markets have adopted shared services models with increasing enthusiasm, over the past 10 years, German companies are still showing some hesitance in following suit. According to the Hackett Group, of the approximately 4000 shared services centres world-wide, only about 170 are based in Germany."