Shared Services: Emerging Markets

Wikipedia defines emerging markets as "nations with social or business activity in the process of rapid growth and industrialization". This loosely, set definition qualifies a lot of countries across the world that don’t have any ideological, linguistic, religious or any other common ground that set them apart from the rest of the world. At the same time, they do share similar characteristics that make them a distinct group. To start our discussion, let’s focus on these characterizations first. The story of emerging markets I don’t claim to be an expert in this area and what I am sharing in this article is largely my opinion, based on first hand experience — with a bit of generalization, in some cases. When it comes to emerging markets, there are several types of categorization that are used. For this article , I’ll use the following categorization that reflects the dynamics associated with the shared services industry more closely than the others. Emerging markets are divided into three categories: 1) rich in mineral resource (countries in Africa, Latin America, Russia), 2) rich in human resource (China, India, Philippines), and 3) rich in financial resource (countries in the Middle-East). The reason for using this differentiation is to set the tone for the strategy for each of the markets, which may be different for each category. Most of the emerging market countries were part of developing countries in the past and lacked in basic infrastructure like electricity, roads, communication, etc. With the rapid development in the technical IT and Telecommunications environment, however, some countries from this group have taken advantage of these changes and have lifted themselves to achieve stellar growth and are now competing with the developed market. Another point to note is that, over the past couple of decades, the traditional developed market has gone through some economic turmoil and growth has been sluggish due to changes in the world older. These changes have resulted in massive economic and financial impact on these countries, and there is a lot of stagnation in the market due to supply higher than the actual demand. As a result, a lot of companies from developed countries have started expanding into emerging markets. At the same time, several companies from the emerging markets have started making inroads to developed markets. Attributes of emerging markets In this section, I would like to touch upon some broad attributes of the emerging markets. Bureaucracy: Some say "bureaucracy" is a legacy from colonial pasts, others attribute it to the "power" of authority; whatever the case, the biggest frustration for an international organization is likely to be bureaucracy, especially when dealing with governments. As well, a lackadaisical attitude seems to get embedded in every aspect of society and now seems to permeate across to the private sector and multinational companies. While obviously the attitudes of people in multinationals have not been corrupted to the same level as in government, the fact is this "corruption" does exist and one should always account for it accordingly. Archaic regulations: A large number of these countries had been colonized in the past and, post-independence, have been beset by civil wars and disturbed periods. As a result, regulations are often out-dated and don’t change at the same rate as the market. Moreover, changes brought about by the government may be ad hoc and appear to favour a particular sector over others. This poses a challenge in setting up as well as running operations for multi-national companies. At the same time, however, there are market economies like the Gulf Cooperation Council in the Middle-East, Singapore, and Hong Kong that are free market economies and have limited regulations. Exposure to multi-national businesses: In general, these countries tend to have limited and sometimes little presence of multi-national companies in-country. This fact gives rise to several phenomena that become specific to these countries. Over supply and limited demand of jobs: Jobs with multinationals tend to pay a lot higher than their counterparts and so these jobs tend to be coveted. Due to limited number of jobs, they are susceptible to nepotism and in some cases open to bribery While on paper a lot of candidates qualify for open jobs, they clearly are not up to the mark when it comes to communication, behavioral skill-sets, accents, etc, that are required by multinational companies. So don’t expect people who are in your organization but based in these countries to behave and comply with same work ethics that you have. In the financial services world, closing your books on time is considered sacrosanct in the West; it can be considered just a guideline in these countries, where closing on time is often considered a "nice to have". Societal factions are often extended to the office environment. People belong to different tribes, castes or groups in their country’s societal model. Unfortunately, these factional differences have an impact on the office environment – people belonging to the same faction tend to stick together, socialize together, and worst of all are shown preference in promotions. It’s relationship over merit. Once people are exposed to, and acquire reasonable experience in, multinationals their marketability increases ten-folds. People with 2 to 5 years of experience tend to jump from one company to another. These people are in high demand and are constantly being pursued by head-hunters. Even the smallest of altercation with the line manager or dissatisfaction over salary or issues like office-space can trigger an exodus for these employees. I know of several examples where people have left their companies for as little as 50 USD. Cultural difference: Cultural difference can be in work ethics, developed vs developing country, industry vs industry, linguistic groups, or even hierarchy. While several other categories of differences may exist, for our discussion we’ll focus on these. Controllership and Compliance: As local operations are managed by local people, their interpretation of global standards of controllership and compliance may not be at the same level as they are designed for. Part of the reason is that the local component of the entire global effort is only small. The local people usually have a good understanding of the local components, but they struggle on the global components, as often there are no handbooks written on the topics. Process Standards: Due to lack of enforcing standards we also see this phenomena, whereby people in charge have resorted to defining their owns standards for processes. Unfortunately, in most such cases, the standards are poor and highly deviated from the standard global practice. A further challenge is that, once these skewed processes get firmly rooted in the practice, it becomes extremely challenging to weed them out. Frequently, the pretext of country complexity/regulations is given to argue a personal approach to processes. Volumes: Most of these countries, except maybe India and China, have relatively smaller scale and volume of transactions since the multinational organizations may have been new entrants to the markets and are in growth mode. Corruption: The majority of the emerging market countries are high on the corruption list. Moreover, the level of corruption is strongly embedded in the daily lives of the common man, who would not blink an eye to pay a "facilitation fee" when trying to get some work done by a government agency. In fact, they are so used to this way of getting things done that even when they move to multi-national companies they may be tempted to resort to this route to get work done on behalf of their parent company. This can be hugely detrimental, legally as well as in impacting the company’s image. Relationships: While a fair level of process standards documentation may exist, in practice, a large chunk of work will deviate from the standard approach to give preference to personal requests and relationships. For example: I have seen examples of people using their connections to release an out-of-turn payment. Nepotism: Too often, meritocracy is overlooked in favor of personal candidates, especially for coveted positions. This phenomenon has multiple effects on the local work environment. It can lead to low morale and unwanted attrition. But more importantly, when less competent people start running the show, results are often desultory and productivity falls. Collective society thinking: A large number of these "emerging" countries used to live in a collective society, with a strong sense of hierarchy. The head-person usually called the shots in all spheres of life. The more junior people didn’t have much opportunity to express their opinion and everybody in the tribe/society had to abide by the rules. Any violation was met with severe punishment. This thinking is extended in today’s work culture, where the local boss is all-powerful and the juniors don’t have much say in how work is done. Absolute obedience is required at all times – otherwise they may lose their jobs. Power distance: The social divide between the "haves" and the "have-nots" is huge. And one way the "haves" cling maintain their position is through "Power": Power of influence, power of exercising authority, power of control, and power of buying. Power rests in only a handful of people and, therefore, to get work done locally the international teams need to know where the power centers are. Salary differences: Salary levels in absolute terms (except for oil-rich nations) tend to be lower than in developed markets. As a result, human resources-rich countries like India, the Philippines, and China have become huge destinations for outsourcing work. Country infrastructure: As these countries have embarked on high growth paths, the focus is on these principle areas: physical infrastructure (roads, railways, air travel), healthcare, and finance. Strong government involvement: While most emerging market countries welcome multinational companies with open arms, exercise caution, since a change in regime can easily forfeit what you have invested in the country. Also, governments can be whimsical when it comes to changing regulations overnight, or being influenced by your competitor and bringing about changes that favor them. Shared services landscape As emerging countries’ economies are being driven by different parameters, the approach to shared services is also very different. Referring to my earlier categorizations, we see distinct differences. On the one side, human resources-rich countries like India, China, the Philippines, and Mexico are attracting work from more advanced economies largely due to labour arbitrage; their position is therefore one of a "net insourcer". Similar patterns are observed in Eastern European countries like Hungary, Poland, and Romania. On the other hand, countries with significant financial or mineral resources are inching towards more "net outsourcing". For the sake of this article, I will focus on the mineral and financial resource-rich countries that have recently (in the past 4-5 years) started dabbling with the shared services idea. Development of shared services in mineral or financial resource-rich countries As the developed markets have become saturated and the recession has hit these markets heavily, a large number of multinational organizations have started making inroads to these unchartered, emerging countries. In addition, energy-hungry countries like India and China have also started building relationships and investing in these emerging market countries. This growth has principally followed the following two pure models and one hybrid model: Setting up from scratch, followed by organic growth Extending organizational infrastructure to absorb the new sites A combination of both the above On deeper analysis, we find organizations generally base their models on the three attributes people–process–systems. They implement these attributes at different levels, based on elements like cost, statutory needs, business needs, etc. Our story: GE When GE started to expand into the emerging markets, we initially saw all three models being used. While more structured items like tax and statutory needs were addressed centrally, "softer" elements like people standards or process standards were not uniformly applied, as there was no central or enterprise standard. After a few years of heavy growth in emerging markets, we started facing challenges that questioned our conventional approach to these markets. For mineral rich and cash rich countries, we faced the following challenges: Cost of living had risen exponentially Wages had increased significantly and were at levels similar to western standards Infrastructure was often still poor Network connectivity was very poor and/or prohibitively expensive Experienced and multi-national compatible people were hard to come by Local practices made hiring a tremendously long process (6-9 months) Operational setups were sub-scale and often at the mercy of local employees Remote management not very effective Sub-scale growth was difficult to handle. If the growth meant an increase of activities by a third or a half of a person, you either had to make the existing person work longer or over-invest by hiring one extra headcount. Often, organizations resort to forcing existing people to absorb the additional work, causing frustration. This may not be a problem where the local setup is large but setups with less than 5-10 people in a department will face this issue Global HQ often resorted to "ivory tower" approach For the people rich countries, on the other hand, we experienced different challenges – but at the same time, some benefits: Due to large number of people available with the right skill-set, large companies started to move labour to low cost countries like India, Philippines, Mexico, China, etc (work arbitrage). Adoption of multi-national company cultures happened faster than at counterparts in other parts of the world Larger scale meant that high-value investments like ERP implementations were a lot easier to manage in these countries GE’s strategy As the challenges started becoming bigger and started acquiring ominous designs, one thing that became very clear was that our conventional approach to growth was not sustainable. To make the situation worse, we started getting into regulatory, tax-, and process-compliance issues, especially in small-scale operation countries. Therefore, we needed to look for alternate models that provided scale as well as strong controllership/compliance. Moreover, to operate in emerging markets it is important to be able to qualify and characterize the challenges, quantify the risks, and develop strong mitigation plans. At the end of the day, for a company to operate in the emerging market it needs to minimize its risks and exposure. A few years ago, while we were reviewing the state of operations, I came across an article from Pankaj Ghemawat on globalization. In this article, he introduced the concept of an AAA model. AAA stands for "adaptation, aggregation and arbitrage". Based on this article, I created a presentation that I shared with my leadership team where I suggested the following: Adaptation: This was to be valid for small sites. Adaptation meant how to get these small and remote sites to be more "GE" in their functions and operations. We decided to extend global policies and procedures (customized to local needs but still retaining the GE characters) to these sites. We also decided to expose the local teams to broader global leadership through conferences and meetings (1 x quarter physical interaction); shoulder-to-shoulder time with big site teams. Aggregation: For the processes where we had standard platforms and that were easy to transfer (or to conduct remotely) we decided to create regional hub and spokes. Processes like AP, Account Reconciliation, and Accounting were included in the hubs to service the satellite spokes. Arbitrage: This was a unique point and almost came as an afterthought. While we followed a long-term strategy to outsource work to low cost countries and a short term strategy to create a hub in the Middle-East, huge increases in the cost of conducting operations in the Middle-East (this was in the pre-recession period) and the fact that large numbers of employees in the region came from the Indian sub-continent, made us re-think creating a hub in the UAE or Bahrain versus setting up a hub/outsource to India, as both were in similar time-zones. The great connectivity we had with Genpact sealed the deal: we changed our strategy to partner with Genpact and outsource work to India. Similar to the aggregation model, we outsourced AP, General Accounting, Fiscal Closing and Reporting. Apart from the AAA strategy, we incorporated two more A’s in our 4-year plan. These two A’s were: Attract talent from other multinationals and the "big four" accounting firms in the region Accelerate platform rationalization – rationalize and globalize our IT platforms from high double digits to low single digit Strategy execution Our initial execution plan allowed for a period of four years, including outsourcing, creating captives, IT/ERP implementation, global process alignments, etc. As this was a large scale Change Management program, several elements have evolved over time. Moreover, since we continued to grow as a business, this added its own set of complexities. As happens with all organizations, people change jobs, organizations change structure, and priorities change. As a result, the "people" position that prevailed four years ago is very different from the "people" position today. However, we have been able to execute, broadly, on most of these initiatives but have learned some new lessons, and understood both emerging markets as well as change management initiative dynamics better. Some of these experiences and stories will be for a later date, in the next article. Overall, this journey has been very exciting and unique, especially for me, being in the center of it. This article series will provide some insight into what we went through at GE, with bits of those exciting experiences thrown in.

Shared Services: Emerging Markets

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Shared Services: Emerging Markets

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