2015: Small and Medium-sized Enterprises Mark a New Frontier for Shared Services & Outsourcing

The mid-market is waking up to service delivery models that can help with assimilating acquisitions and supporting expansion – both domestically and internationally SMEs Drive Domestic Growth The market sector commonly referred to as small and medium-sized enterprises (SMEs) accounts for 99.9% of non-farm businesses in the US and employs roughly half of the non-farm private sector workers. Though definitions vary, the focus tends to be on the group of enterprises that range from $100mil to $2billion in revenue, and employ less than 10,000 FTEs.These small and medium-sized enterprises outnumber large companies by a wide margin and employ far more people. They are also responsible for driving innovation and competition in many economic sectors, frequently showing more efficiency in encouraging innovation than large firms, according to a US International Trade Commission report1. This research shows SMEs as responsible for roughly half the GDP generated by the non-agricultural sector, with primary export markets Canada and Mexico, but also high-income markets like Hong Kong, Israel, and Switzerland (principal exports are computers, electronics, machinery, and chemicals, as well as labor intensive categories like wood products, clothing, and accessories). SMEs are significant in terms of their cumulative influence over employment and their agility in adjusting to changes in the marketplace. According to the SBA’s Office of Advocacy: "Small firms accounted for 63 percent of the net new jobs created between 1993 and mid-2013 (or 14.3 million of the 22.9 million net new jobs). Since the end of the recession (from mid-2009 to mid-2013), small firms accounted for 60 percent of the net new jobs."2 As growth – both domestically and abroad – becomes a reality for small and mid-sized businesses, these organizations will play a significant role in bolstering domestic GDP. To do so, however, SMEs will need to lean on optimized service delivery methodologies, technology solutions that place automation within affordable grasp, and data analytics that provide transparency over both internal operations and customer preferences. The Shared Services model – previously considered out of scope for reasons of scale and cost – is now a realistic strategy for SMEs wishing to leverage their capabilities to better effectand is key to their economic progress. Foundation for Success The very elements that help mid-market organizations succeed in their industry also bode well for a more proactive, centralized, services delivery strategy. Characteristics of SMEs include: family-owned and therefore relatively stable building on long-term strategies export-oriented a relatively strong capital base largely self-financing and innovation driven3 strong regional ties, and an intensely customer focused culture. These factors make a well-considered service delivery framework a natural partner for progress. The lean manufacturing processes that mid-market companies have already leveraged to such great effect for production, and the widespread use of automation and digital technology to take advantage of process efficiencies, have already set their products apart. It’s now time, experts agree, to match the manufacturing "edge" with equivalent inhouse support services. It’s a perfect scenario, in fact, for optimizing the business processes that support expanding operations. By already having refined their supply chain, production, and distribution networks, SMEs are able to react to new market opportunities quickly. But as these markets broaden and become more international, and as greater export-orientation increasingly puts SMEs into competition with global players and in emerging markets, the traditional services framework may not be enough to sustain momentum. The multi-process landscapes that have commonly evolved across these companies, while offering flexibility in regional activities, will not translate as successfully into the fast growing emerging markets of Asia, for example, where so much of current growth is concentrated. Shared Services models have already been credited with offering process discipline to a large number of the world’s leading corporates. The expansionist policies of mid-size corporates are now delivering the same option to their doorsteps. Shared Services presents a reliable, and proven, strategy for delivering standardized, quality, and measurable services across a simplified systems landscape – it is this approach that is now proving increasingly popular among a large number of US-based, mid-size companies. Size is Not an Obstacle While size has traditionally been a concern – we tend to think of a "critical mass" that makes Shared Services viable – the notion that Shared Services are only for F500 sized corporations no longer applies. The model, in fact, presents significant opportunities for SMEs whose internal organizations and frameworks are often fragmented, decentralized, and characterized by multiple support processes delegated to external parties. SMEs can reap the same benefits – and perhaps have proportionately more of an impact – as corporations with tens of thousands of employees around the world.The reason is specifically linked to the fact that most of these smaller companies don’t operate with single platform ERP systems, are often guided by random development instigated at local levels and driven by local needs, and lack a comprehensive knowledge management strategy. Process Improvement Trumps Cost as Driver While cost is generally seen as a key driver for Shared Services, a KPMG report4 on Germany’s SME sector (widely held up as a poster child for the global SME market) notes that cost is not the number one driver of Shared Services for these Mittelstand organizations. Instead, these companies are chasing process improvement, better quality of service, and control – whereby "standardization" is listed as one of the most valuable results of Shared Services implementation. International healthcare company Coloplast (9,000 FTEs), for example, established a Finance shared services in Poland five years ago in an effort to improve process consistency and quality across more than a dozen countries. Wojciech Faszczewski, Managing Director of this SSC, explains his challenge as driving quality, standardization and transparency across fragmented processes. Lacking the size to leverage significant transactional scale, and therefore cost savings, he recognized from the start that there was far more to be gained by centralization than just cost savings: "Because of the size of our enterprise, we could not focus on or leverage volume. Instead, we focused on value added services," he explains. International Markets Require Scalable And Reliable Support To understand why process control, not necessarily cost, is driving Shared Services adoption, consider the rapid globalization of markets and the continued pressure to deliver results. Rapid globalization demands agility on the part of a company’s ability to respond to customers’ changing needs, as well as the needs of brand new customers. Where much of this growth is also M&A driven, new businesses need to be rapidly integrated and assimilated. Standardized support processes play a significant role here, especially in Finance and Accounting, and Human Resources. The findings of the KPMG survey referenced above support this idea, highlighting organizations that experience rapid growth through international expansion/acquisitions as adopting Shared Services at a faster rate – challenged as they are with harmonizing administrative processes across separate business units. Apart from the obvious benefits around integration and control, this trend also reflects the modernization of historically evolved processes. One company that can relate is Kennametal, an American organization with European headquarters in Switzerland. Although at 14,000 FTEs and with $3 billion in annual revenues Kennametal lies just outside the traditional definition of an SME, how it leveraged its SSO for expansion makes it a good case study for the SME sector. Kennametal is one year into a three-year global HR Shared Services implementation, to gain additional scale as it continues an expansionist strategy that has already seen it acquire 3 groups of companies over the past 3 years alone. Providing quality support for Kennametal’s international staff is a key priority, explains Sascha Weiss,Manager Human Resources Operations EMEA, and it is important to be able to deliver the same quality services as the company expands. The driving force behind moving to Shared Services, therefore, was the recognition that a robust staffing service was needed to carry on a sustainable growth pattern. The company is currently in the process of rolling out a global business services model over the next two years. The Time is Now SME organizations still holding out believe that there are simply not enough persuasive examples of Shared Services’ application to their sector, or are overwhelmed by the multiple process landscapes that have evolved over time, considering them too complex to tackle. An additional factor is the lack of management resource or extra capacity to take on SSO management. Faced with these constraints, many mid-market companies have preferred to stick with what they know, rather than embark on what they perceive as a risky transformation. Given emerging technology solutions that offer business process as a service (BPAAS) or process automation at lower costs, however, the tide is turning. Optimized Shared Services simply make better sense for a sector looking to capitalize on growth opportunities in the face of strong, and increasingly global, competition. (See Sidebar: SMEs Running Shared Services.) Tom Zbaren, an SSON columnist specializing in helping SMEs tap into outsourcing solutions, confirms this: "The challenges presented by operating across multiple time zones, the need to make the most of collaborative opportunities, and the cultural melting pot reflected in remote teams, all mean that the timing is opportune for SMEs to leverage Shared Services or BPO models. Outsourcing in particular offers the global connectivity that many of these companies need to access for that next big step," he says. "While big corporations have already profited by navigating these [BPO] waters, now small and medium-sized organizations are recognizing the same opportunities," Zbaren continues. At the same time, he cautions, BPO firms will need to reassess their approach in connecting with this market. To date, BPOs have focused primarily on increasing their slice of the pie, says Zbaren. For the SME market it will be more important that providers build a partnership that works well, and demonstrate that they are paying attention to the pressing issues facing SMEs. [eventpdf] [Note: if you liked this article, please use the buttons on the left side of the screen to share it across your LinkedIn groups – and contribute to this discussion by posting your thoughts in the comment section, below. Thank you for being part of SSON's community - Barbara Hodge] References 1. SMEs: Overview of Participation in US Exports, USITC 2010 2. Small Business & Entrepreneurship Council: https://www.sbecouncil.org/about-us/facts-and-data/#sthash.96IgqmUf.dpuf 3. According to the Small Business Association’s (SBA) Office of Advocacy: "Of high patenting firms (15 or more patents in a four-year period), small businesses produced 16 times more patents per employee than large patenting firms." A 2008 study by Anthony Breitzman and Diana Hicks for the Office of Advocacy ("An Analysis of Small Business Patents by Industry and Firm Size") found that "small firms are much more likely to develop emerging technologies than are large firms. Specifically, although small firms account for only 8 percent of patents granted, they account for 24 percent of the patents in the top 100 emerging clusters." https://www.sbecouncil.org/about-us/facts-and-data/#sthash.96IgqmUf.dpuf 4. Mittelstand Setzt Auf Shared Service Center https://www.kpmg.com/de/de/bibliothek/2014/seiten/mittelstand-setzt-auf-shared-service-center.aspx Source: http://www.sbecouncil.org/about-us/facts-and-data/

2015: Small and Medium-sized Enterprises Mark a New Frontier for Shared Services & Outsourcing

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