Published: September 01, 2012
Those based in, or who have visited London this summer will have witnessed remarkable achievements in an amazing diversity of sports. Not only have elite able-bodied athletes continued to redefine standards of sporting excellence, but the Paralympians have pushed perceptions of the limits of human achievement even further. Perhaps the message of this summer of sport is that personal achievement is everything, and every country should strive to outdo each other in its pursuit of excellence. But perhaps not.
On day three of the Paralympic Games alone, athletes from 115 competing countries visited the official prosthetic, orthotic and wheelchair technical service provider. Eighty technicians completed 277 complex repairs to ensure that these athletes could continue to compete without interruption. It would have been extremely costly and logistically inconvenient for these 115 countries to provide their own individual technical services. Instead, leveraging a single service provider was more efficient, cost-effective and enabled each athlete to focus not on the support functions that they needed to compete, but on delivering the sporting prowess and competitive edge for which they had trained for so long.
Every company encourages entrepreneurship and ever-higher standards of excellence in each country in which it operates. Companies can often gain considerable advantage by demonstrating superior skills, expertise, innovation and local market knowledge to those of their competitors. So how can these companies foster these skills and ensure that employees are able to focus on the activities that create business success? Freeing up employees from unnecessary administration, enabling them to channel their time and energy into value-added activities is a major factor in achieving this. Consequently, companies across a wide range of industries, profiles and geographies have recognised that centralising business support functions can improve the efficiency of these activities, reduce costs, and facilitate core business activities.
This is not limited to finance, with procurement, IT support and HR amongst the business functions that companies have centralised successfully. To support the financial operations of the business, payments, treasury back-office processing, expenses management, eInvoicing and in some cases, collections are amongst the business activities that can be centralised into shared service centres (SSCs) most advantageously.
This article features insights from Filipe Simao, Head of Client Advisory, BNP Paribas and Sandip Patil, Regional Head, Payables and Receivables, Asia Pacific, Treasury and Trade Solutions, Citi Transaction Services who look at some of the considerations when setting up or evolving an SSC, and how companies are continuing to reap the benefits of centralisation.
As Filipe Simao, BNP Paribas outlines,
“The role of SSCs has evolved significantly over the years. Early SSCs often provided IT support, which was linked to a trend for business process outsourcing. The shared services model then expanded into areas such as finance and HR administration, and now, they frequently take responsibility for a wide range of non-core activities.”
Companies globally are increasingly centralising finance and accounting activities such as payments, reconciliation, cash allocation and forecasting, enabling consistent processes, rationalised platform and centralised expertise. While European and North American multinationals may historically have been the pioneers of centralisation, Sandip Patil, Citi explains that this is no longer the case, with considerable growth of SSCs in Asia,
“As both foreign and Asian multinationals expand their presence in the region, there is a greater need for operational efficiency. This is best driven through centralisation and standardisation of finance and accounting activities. Consequently, we are witnessing huge growth in the number of SSCs that we support, now totalling around 300 in Asia alone and more than 1,000 globally.”
SSCs are no longer limited to the largest multinationals; effectively, any company that has business support functions replicated across multiple locations may benefit from centralising services, rationalising technology, standardising process and ultimately reducing costs.[[[PAGE]]]
Financial SSCs will differ in their responsibilities depending on the needs, constraints, culture and business organisation of each company, but as Filipe Simao, BNP Paribas discusses,
“Financial SSCs typically share similar objectives even if their functional responsibilities differ: to increase efficiency and control, which includes enhancing visibility and managing risk.”
The latter point has become particularly important over recent years. While cost savings were typically the primary driver for shared services in the past, ensuring control over financial processes and managing risk are now just as likely to be headline objectives.
Sandip Patil, Citi continues,
“Companies are inevitably at differing stages of their SSC development. Some established their SSC in Asia as early as the late eighties, while others are in the early stages of building a shared services model. In most cases, strategic cost benefits, quality and control remain the primary drivers, and we have seen clients realising cost savings of up to 40-45%.”
One of the most logical, and often easiest financial functions to centralise as a first step is payments, but this does not mean the same thing in all cases, as Filipe Simao, BNP Paribas describes,
“In some cases, an SSC will act as a payments hub, which typically implies centralisation of the IT infrastructure. In order to enforce policies and controls, achieve greater standardisation and gain economies of scale, however, it can be very valuable for the SSC to act as a centralised accounts payables (AP) function.”
Figure 1 - click image to enlarge
Centralisation can therefore have quite different implications depending on companies’ objectives and the structures they put in place. For example, a payments hub may be more appropriate for companies where business units have a high degree of operational autonomy, while a centralised AP function is likely to suit companies with more head office control. Figure 1 outlines some of the issues that treasurers and finance managers are likely to consider when contemplating centralisation of financial activities.
Treasurers and finance managers have a range of practical considerations when establishing a centralised operation, including:
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Looking at some of these in more detail: having decided to centralise one or more finance functions, one issue that arises is where to locate the new SSC. Filipe Simao, BNP Paribas explains,
“We are often asked by customers about the optimum location for their SSC, but there is no ‘right’ answer in our experience, which was not necessarily the case with the IT SSCs of the past. Finance and treasury is still seen as a sensitive business function, so outsourcing to a BPO or establishing an SSC in a low-cost location that may be remote from the company’s regional or global headquarters is not always desirable. Consequently, it is more likely that an SSC supporting AP and/or treasury operations will be located close to group treasury. For example, a large proportion of French multinationals locate their European financial SSCs in France, despite higher labour costs than in some Eastern European countries for instance.”
He continues,
“There are examples of companies locating these centres in more diverse locations too, however. Availability of resources, language and skills, labour laws, infrastructure, country risk and the time/ease of travel to the headquarters and subsidiaries are all factors involved in the decision. Ireland and Netherlands are both traditionally popular amongst US multinationals in particular, and countries in Central & Eastern Europe such as Poland and Czech Republic are also attractive destinations.”
Sandip Patil, Citi also discusses,
“There are a variety of factors that influence companies’ choice of location for an SSC. Firstly, they consider the physical and economic infrastructure, such as availability of labour, utilities, telecoms and real estate. Secondly, they look at strategic and operational issues such as investment benefits, political and economic risk, and the regulatory environment. Thirdly, they consider the day-to-day experience of operating an SSC, such as lifestyle and the language, culture, work ethic, skills and productivity offered by the local workforce.”
He continues, particularly looking at SSCs in Asia,
“Having considered these factors, many companies have chosen low-cost countries like India or the Philippines in the past, as they typically meet their economic, geopolitical and workforce objectives. These locations continue to be popular, and in addition, Malaysia and Singapore have become very attractive as well. We are also seeing a significant expansion in the number of SSCs located in North Asia, especially China in order to support companies’ strategic growth plans in this part of the region.”
I
n most cases, SSCs provide centralised business support for one or more regions, often starting with one country or business and then extending the number of business units supported over time. Alternatively, an SSC may start by providing one business function, and then expanding the range of services it delivers over time. SSCs with a global reach are quite rare, as Filipe Simao, BNP Paribas suggests,
“There are relatively few organisations that are able to implement a global AP function, as it can be difficult to ensure a comparable quality of service to subsidiaries in every country and region through a 24-hour support centre. Those that have done so often locate these centres in cities such as Manila and Kuala Lumpur, but these are exceptions.”
Whatever the range of activities that the SSC performs, and the countries which it covers, the impact on subsidiaries needs to be considered carefully as Filipe Simao, BNP Paribas discusses,
“It is important to plan how the SSC or a centralised AP function would be implemented in practice, not only in terms of the implications for a centralised unit, but also for subsidiaries. For example, subsidiaries in each country may dedicate either full-time or part-time resourcing to cash, treasury or payments-related activities. Companies therefore need to consider how these roles can be adapted to reflect the change in responsibilities if these activities are centralised.” [[[PAGE]]]
If an SSC is to be successful, it needs to demonstrate performance that is at least equivalent to the business unit’s own performance before centralisation at a reasonable cost. This is particularly difficult for business units located in developing or lower-cost countries which may baulk at paying equivalent costs to business units located in higher-cost locations. Performance targets therefore need to be defined objectively and monitored regularly through consistent key performance indicators (KPIs). Filipe Simao, BNP Paribas outlines,
“A centralised AP/SSC function needs to be able to deliver a quality and responsiveness of service that is at least equivalent to that provided by the local team. Consequently, there need to be service agreements in place between the SSC and subsidiaries (which are also required for tax reasons). Sometimes, systems are in place for monitoring and reporting operational performance.”
One of the drivers of improved performance, and lower costs, amongst SSCs is technology enhancement, as Sandip Patil, Citi highlights,
“Technology innovation is also driving greater efficiency amongst SSCs. In the past, dealing with multiple instances of ERPs was a common challenge. Today, however, companies are seeking to consolidate onto a single instance, and also to expand to more value-added ERP modules to link with business partners. This makes it easier to implement related efficiencies such as SWIFT connectivity or standardisation using interoperable XML-based formats.”
Leveraging a single IT platform, multi-bank connectivity and standardised formats has been an objective for many years, which companies have achieved with varying degrees of success, but this is now becoming a reality. This is also one way in which SSCs established some years ago can renew and refresh their activities and continue delivering value to the enterprise. Sandip Patel continues, referring to well-established SSCs,
“Most SSCs have successfully delivered critical projects such as bank rationalisation, automation and standardisation of financial processes and technological interactions including file transmission and connectivity.”
Many large multinationals in particular have already demonstrated successful centralisation into SSCs or payment factories, and are now looking at how they can move to the next level of efficiency and add further value to the organisation.
As Sandip Patel, Citi demonstrates,
“Organisations that set up SSCs some time ago are now asking ‘what next?’, focusing not only on tactical savings but on the opportunities for strategic cost management, business growth contribution and incremental additional value around strategic goals of the organisation. In this respect, SSC objectives are becoming more closely aligned with those of the mainstream business including sales and distribution, procurement and strategic treasury management.”
No longer are SSCs restricting their activities to isolated functions such as payments or collections; they are becoming more intrinsic to the financial supply chain as a whole, aligning business activities across the order-to-cash or purchase-to-pay cycle that may have previously been conducted independently. Sandip Patil, Citi continues,
“Asian multinationals are often expanding across new geographies at a rapid rate, fuelled by strategic M&A activities. These companies are using SSCs to maintain the efficiency of their operations, not only to reduce costs and enhance controls, but also to drive further growth. For example, many Indian and Chinese clients are expanding rapidly in Asia using a centralised production model. Consequently, optimising the order-to-cash cycle is essential to their distribution model, so they seek to establish a collections SSC as a centre of excellence, to which new countries can be added as the company continues to grow.”
Even if some activities continue to take place locally, processes need to be aligned to ensure maximum efficiency. For example, a payments factory cannot be truly efficient if invoices sent to business units remain on someone’s desk for two weeks while they’re on vacation before reaching the SSC. Consequently, it often makes sense to centralise associated functions such as invoice receipt and payments to avoid obstacles in the process. Filipe Simao, BNP Paribas concurs, and emphasises that SEPA is presenting opportunities for centralisation,
“In other situations, companies are extending the scope of their SSCs, continuing the trend we have seen over a number of years. Some activities are more difficult to centralise than others. For example, while it is often desirable to centralise collections, not least to improve credit management and collection processes, and enhance cash flow forecasting, it may be important to maintain proximity with the sales teams. Some companies, such as insurance, leasing and utilities, that have a high proportion of collections through direct debits may find it more straightforward however, particularly as SEPA Direct Debits now enable cross-border direct debits.” [[[PAGE]]]
Although SEPA has had a slow start, companies are more likely to be able to centralise payments, collections and related functions such as credit management, reconciliation, account posting and eInvoicing as a result of greater standardisation across euro-based countries. Filipe Simao, BNP Paribas suggests that some SSCs are also moving away from their traditional service company role,
“Some mature SSCs are moving beyond cost savings to becoming service companies that may in some cases aspire to become profit centres. There are examples too of these SSCs taking on activities on behalf of third party companies.”
This is an interesting potential development. For example, BPO (business process outsourcing) of finance functions has only enjoyed limited success in the past as processes such as payments are often considered commercially sensitive. Furthermore, most companies initially set up SSCs to enable resources to be channelled into front-line activities. With some SSCs potentially becoming profit centres and even outsourcing providers, it is interesting to consider how these centres form part of the corporate strategy or whether they will ultimately be spun off into separate businesses.
One of the major factors in the successful establishment of shared services, and the on-going success of a more mature SSC, is the right banking partner. Major banks have developed specialist skills and capabilities to support finance SSCs and can be an important source of advice based on their experiences with other clients as well as their solutions portfolio. As Filipe Simao, BNP Paribas says,
“Banks such as BNP Paribas offer a variety of services for centralised payments and collections functions, e.g., supporting the ‘payments on behalf of’ model. To do this successfully, a bank needs expertise on payment methods in each country and access to clearing systems, without the customer needing to engage directly at a local level. Consequently, a combination of local presence and centralised support and solutions is essential.”
Sandip Patil, Citi adds,
“Whatever the degree of maturity in the SSC, finance managers and treasurers are seeking a bank that can act as a trusted advisor and share best practices based on its experience of working with comparable organisations, in addition to having the relevant regional and global solutions to meet the SSC’s transactional and information requirements. Further, partnership in delivering against these best practices adoption is core of our SSC value proposition.”
We are increasingly seeing new ways of working resulting from this bank-corporate collaboration, as Sandip Patil, Citi demonstrates,
“We help companies implement and expand their SSCs in two key ways:
Firstly, through horizontal expansion. Together with the customer, we implement financial processing for one or two countries, and then roll out its capabilities more widely. This approach is useful in testing and proving the SSC concept and then replicating this in a standardised way.
Secondly, we share our depth of experience by working through each step in the financial supply chain to ensure that each process is as efficient and integrated as possible. This is vital for stripping out costs and optimising working capital. This is typically a joint approach including both the SSC and regional treasury centre, aligning objectives and information flows. Recently, we worked with a customer to release hundreds of millions of cash from the supply chain, reflecting the huge strategic value of such a supply chain initiative.”
Filipe Simao, BNP Paribas also provides an example:
“We are working with one customer to centralise AP support in an SSC in India. Subsidiaries initiate payments directly, but these are tracked by the SSC. The customer’s systems are integrated directly with our case management system, therefore benefiting from real-time tracking and exception management, reducing the number of errors and queries significantly. Furthermore, subsidiaries do not need to wait to receive account statements to be alerted to account receipts, as incoming cash flows can be reconciled and posted to customers’ accounts immediately.” [[[PAGE]]]
While many SSCs have matured to a certain level, there is still a great deal more that can be achieved, particularly in fast-growing markets such as Asia, as Sandip Patil, Citi describes,
“Looking ahead, we anticipate that the current trends we are seeing in the establishment and growth of SSCs in Asia will continue, with an increasing number of Asian multinationals seeking to centralise and optimise financial processes as also, all global companies expanding in Asia. We also envisage that SSCs will become more specialised to provide centralised processes in specific regions, such as separate SSCs for North and South Asia. This approach enables standardisation across a region but recognises the specific requirements in more regulated economies. Finally, the assimilation and integration of technology will continue, with consolidation of ERPs and leveraging of bank-agnostic communication channels such as SWIFT. Mobile technology and cloud based services are increasing the benchmark even further. Overall, it is one of the most exciting initiative for us and our clients.”
He continues by emphasising that not only is the internal use of technology facilitating SSC evolution, but new business models are also driving change,
“Facilitating growth is not simply about supporting existing manufacturing or distribution models in new regions. The growth of digital commerce brings enormous potential for new distribution models that may be less infrastructure-intensive. We are seeing considerable interest in digital business models across many industries, which will in turn require different services from SSCs, such as facilitating online payments and fulfilment, including cross-border payments and liquidity management.”
The increased maturity of digital business models, cloud computing and convenient access to technology through multiple devices could change fundamentally the concept of shared services in the future. Will physical SSCs become an anachronism? ‘Virtual’ shared service centres leveraging common processes, standards and technology are now becoming a technological reality, and potentially correspond more closely with new business models that are emerging. While the history of SSCs has already extended for 25 year or more, it seems likely that there is still a considerable distance to go.
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