Earnings pressures boost shared services. (Shared Services).Squeezed by the economic slowdown, competition, low consumer confidence and high labor costs, companies' responses are drastic -- closing locations, laying off employees and moving to cost-efficient operating models Operating Model is a term that is used in many contexts. In essence an operating model describes how an organization operates across both business and technology domains. The Operating Model describes what is important for the organization. . The search for identifying cost-reduction opportunities has led large, multi-division companies to implement 'shared services" models. This involves eliminating redundant and unnecessary support or "back office" costs by sharing centralized cen·tral·ize v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es v.tr. 1. To draw into or toward a center; consolidate. 2. services across multiple units within an organization. Non-core business functions labor costs - which can amount to a significant percent- moving age of hard -earned sales revenues - tend to grow proportionally large when duplicated at multiple locations. Support costs include accounting, payroll, purchasing, information technology, human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. , legal and tax. Several factors have led to the increase in shared services shared services, n.pl the administrative, clinical, or other service functions that are common to two or more hospitals or their health care facilities and used jointly or cooperatively by them. operating models, the primary driver being cost reduction. Studies of companies that changed to shared services indicate that they received a large and quick payback Payback The length of time it takes to recover the initial cost of a project, without regard to the time value of money. . According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the 2001 Andersen/akris.com Shared Services Study, 29 percent received payback in years 1-2 and 77 percent by years 3-4. (akris.com is a U.S.-based shared services Web site.) In addition, 34 percent of the companies participating in the study realized direct headcount-related savings of 20-40 percent. Companies with savings of over 30 percent generally utilized standard technology, such as a single enterprise resource planning See ERP. (application, business) Enterprise Resource Planning - (ERP) Any software system designed to support and automate the business processes of medium and large businesses. (ERP (Enterprise Resource Planning) An integrated information system that serves all departments within an enterprise. Evolving out of the manufacturing industry, ERP implies the use of packaged software rather than proprietary software written by or for one customer. ) platform, and best practices to achieve high productivity and low employee turnover. The first 50 percent of those savings generally come from consolidation, the next 25 percent from standardization and the last 25 percent from subsequent improvements in the process. Another major catalyst for implementation of financial shared services at companies with multiple ERP platforms is an enabling technology known as enterprise application integration (EAI (Enterprise Application Integration) Refers to various techniques used to share data and business processes in large enterprises. When companies acquire another organization, disparate information systems have to be made to work together. ). EAI enables companies with multiple ERP or custom software platforms to utilize a single financial platform (such as Oracle, SAP, JDE JDE Java Development Environment JDE Journal of Dental Education JDE Journal of Distance Education JDE J. D. Edwards and Company JDE Job Descriptor Entry (Xerox) JDE Joint Multi-User Detection and Multi-Channel Estimation JDE Joint Defence Exercise , Lawson) in the shared services center Shared Services Center is the entity responsible for the execution and the handling of specific operational tasks Accounting, human resources, payroll, IT, legal, compliance, purchasing, security. without changing the existing platforms used by multiple operations and business units. EAI leverages a middleware Software that functions as a conversion or translation layer. It is also a consolidator and integrator. Custom-programmed middleware solutions have been developed for decades to enable one application to communicate with another that either runs on a different platform or comes from a platform, such as MQ Series from IBM (International Business Machines Corporation, Armonk, NY, www.ibm.com) The world's largest computer company. IBM's product lines include the S/390 mainframes (zSeries), AS/400 midrange business systems (iSeries), RS/6000 workstations and servers (pSeries), Intel-based servers (xSeries) , which improves the management and maintenance of interfaces between a central finance platform and the company's disparate business units' software platforms. Common Operating Model Since the late 1980s, large, decentralized de·cen·tral·ize v. de·cen·tral·ized, de·cen·tral·iz·ing, de·cen·tral·iz·es v.tr. 1. To distribute the administrative functions or powers of (a central authority) among several local authorities. companies such as Ford Motor Co., General Electric Co. and Baxter International Baxter International Inc. (NYSE: BAX), is a global healthcare company with 48,000 employees and 2006 sales of US$10.4 billion. Its headquarters is in Deerfield, Illinois. Inc. have been consolidating support operations into versions of shared services centers. In the early '90s, AlliedSignal Inc. developed its world-class financial shared services centers, generating approximately $40 million in annual savings through consolidation, restructuring and process re- engineering (Peter Moller in Andersen's Shared Services Handbook). Recently, Hallmark Cards Hallmark Cards, a privately owned American company based in Kansas City, Missouri, is the largest manufacturer of greeting cards in the United States. Approximately 50% of greeting cards sent in the United States every year are manufactured by Hallmark. Inc. began developing its financial shared services strategy. Brian Kurtz, Hallmark's financial shared services director, explains the decision: "Financial shared services will allow Hallmark to improve efficiency and reduce costs related to essential transaction processing Updating the appropriate database records as soon as a transaction (order, payment, etc.) is entered into the computer. It may also imply that confirmations are sent at the same time. Transaction processing systems are the backbone of an organization because they update constantly. activities (i.e., accounts payable, travel and entertainment, general ledger General Ledger A company's accounting records. This formal ledger contains all the financial accounts and statements of a business. Notes: The ledger uses two columns: one records debits, the other has offsetting credits. ). We believe common financial processes, systems and reporting will also result in improved communication, control and consistency of policy and practice across our diverse businesses. Finally, these benefits should allow us to allocate more financial resources to analytical, decision-support activities that drive revenue and profitability." Traditional Centralization cen·tral·ize v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es v.tr. 1. To draw into or toward a center; consolidate. 2. ? A common misconception mis·con·cep·tion n. A mistaken thought, idea, or notion; a misunderstanding: had many misconceptions about the new tax program. is that shared services is just another name for "centralization of support services support services Psychology Non-health care-related ancillary services–eg, transportation, financial aid, support groups, homemaker services, respite services, and other services ." Far from reality, shared services is more - it's also about improving service to customers, suppliers and employees. The main difference between a shared services center (SSC SSC Secondary School Certificate SSC Standard Systems Center (USAF) SSC State Services Commission (New Zealand) SSC Swedish Space Corporation SSC Salem State College (Massachusetts) ) and a traditional centralized organization is that the SSC is operated and managed as an independent business, with the focus on the "internal client," as opposed to corporate management. Nearly half of the 120 companies participating in a 2001 study sponsored by Andersen and akris.com use a service level agreement (SLA (1) (StereoLithography Apparatus) See 3D printing. (2) (Service Level Agreement) A contract between the provider and the user that specifies the level of service expected during its term. ). The SLA is a contract between the SSC and customers (departments or business units) that describes the services to be provided, the timing of those services, the quality and the cost. The SLA also includes the agreed-upon key performance indicators Key Performance Indicators (KPI) are financial and non-financial metrics used to quantify objectives to reflect strategic performance of an organization. KPIs are used in Business Intelligence to assess the present state of the business and to prescribe a course of action. that will determine the center's effectiveness. Finally, the SLA spells out the remedies for non-performance, as well as dependencies the SSC has on other units in order to meet its objectives. Another difference is that, optimally, SSCs are not run as corporate functions in headquarters sites, but rather in neutral locations often established in cities separate from the headquarters location. There are two reasons for this: first, to ensure the SSC has access to competitive labor rates that may not be available in the headquarters market; and second, to allow the physical space separation necessary for the SSC to truly operate as a business. Many corporations that in the '70s and '80s became disenchanted dis·en·chant tr.v. dis·en·chant·ed, dis·en·chant·ing, dis·en·chants To free from illusion or false belief; undeceive. [Obsolete French desenchanter, from Old French, with the bureaucracy of centralized organizations have now decentralized to improve responsiveness and accountability of business units. Amoco Corp. restructured itself into 17 strategic business groups to speed up decision-making and enhance customer responsiveness. But, removing bureaucracy through decentralization de·cen·tral·ize v. de·cen·tral·ized, de·cen·tral·iz·ing, de·cen·tral·iz·es v.tr. 1. To distribute the administrative functions or powers of (a central authority) among several local authorities. -- although beneficial -- had huge costs associated with duplicating support functions in each business group. As a result, in the mid-'90s Amoco designed and implemented an SSC that achieved economies of scale and eliminated duplication while still meeting customer and management needs. By '97, Amoco was realizing $400 million in annual savings. Shared Services "Report Card" Generally, companies have achieved annual savings ranging from 15 to 50 percent for services performed by SSCs. How much is saved depends upon the functional area (see chart above) and the number of operating units operating unit A type of operating company that engages in transactions with outsiders and that is owned by another business. For example, in 1995 the stockholders of Capital Cities/ABC approved a $19 billion merger with the Walt Disney Company, whereupon or processing locations being consolidated. For example, conglomerates with more than 100 decentralized accounting locations have realized labor cost savings exceeding 70 percent (not including the indirect effect of reductions such as technology support costs). Conversely, organizations with 40 or fewer decentralized accounting locations generally achieve direct labor savings in the 20-40 percent range. A $2 billion Midwest media conglomerate with approximately 35 decentralized business units implemented shared services during the mid-'90s and realized approximately 37 percent in labor and other indirect savings. CFOs cite other factors that drive companies to migrate to shared services: poor service levels, incompatible information systems between locations (limiting e-business solutions) and the desire to manage growth without adding staff. Many companies also employ shared services as a component of their acquisition strategies. Integration of an acquired company is eased significantly if an SSC is in place to perform the financial and support services and provide integrated information through common processes and systems. Customizing and maintaining a number of finance and other support functions in multiple locations can be expensive and time-consuming. Shared services are also often implemented in conjunction with ERP implementations as a means to control ERP-related costs. Companies from virtually every industry have benefited significantly by transitioning their business support processes to a shared services operating model, and many in the Fortune 500 have implemented shared services for their support processes. Michelin C.G.D.E. moved to a shared services operating model as a strategy to align its business model with the New Economy. Trever Brookes, SSC project director for Michelin, states, "We were obviously attracted to the SSC concept by the opportunity to reduce our back office costs. However, we also recognized that as we move into e-business, an SSC built on a standard ERP platform with common business processes would significantly reduce complexity and costs, compared with a decentralized back office." SSC Benefits Cost reduction is often the primary driver for establishing shared services. Other reasons cited by senior executives include: service quality, optimization of working capital and standardization of business processes. Most companies are able to achieve the target cost savings, quality and service improvements they planned for, but careful planning and execution are required. The major barriers to achieving success involve culture and execution. Without senior management visibly and consistently endorsing the strategy, traditional company culture can put up barriers that inhibit the effectiveness of the shared services organization. For instance, a $2 billion Midwest publishing company developed an SSC, and senior management "invited" business unit controllers to participate on a volunteer basis. Many years of a strong decentralized, autonomous culture resulted in major resistance from the business unit controllers. Until senior management "required" the business units to comply with planned headcount reductions (two years later), old ways of doing things and staffing levels remained virtually unchanged. A two- to three-year payback period Payback Period The length of time required to recover the cost of an investment. Calculated as: is normal for most shared services implementations. While the systems and processes are usually in place within nine to 18 months -- depending on the extent of the transition -- it often takes two years for the culture to fully adjust to the new operating environment In computing, an operating environment is the environment in which users run programs, whether in a command line interface, such as in MS-DOS or the Unix shell, or in a graphical user interface, such as in the Macintosh operating system. . Future of Shared Services Three trends appear to be setting the course for the future of shared services: 1) "lights out" processing, 2) outsourcing, and 3) off-shore processing. The ultimate objective is to move to "lights out" processing where automation and Web-based methods minimize the need for human intervention. 1. "Lights Out" Processing.. Web technology will eliminate much of the transaction processing traditionally handled by SSCs -- ironically, by decentralizing de·cen·tral·ize v. de·cen·tral·ized, de·cen·tral·iz·ing, de·cen·tral·iz·es v.tr. 1. To distribute the administrative functions or powers of (a central authority) among several local authorities. some of the processing. This "lights out" vision of not needing SSC intervention for processing activities redeploys processing to front-line employees, customers and suppliers. E-procurement, for example, is expected to flourish and significantly reduce back office processing costs such as purchasing, accounts payable and inventory management. The Web allows online forms to capture the information remotely so that the SSC can trade data-entry for customer service, exception handling and process improvements. SSCs will effectively operate like customer call centers, with tools such as automated call distribution and integrated voice response units becoming more common. 2. Outsourcing: Outsourcing finance, as well as information technology, is an increasing trend. However, companies with back office operations in multiple locations should establish well-run SSCs internally before considering outsourcing. Financial executives in companies that have successfully out-sourced financial or other support processes disclose one important fact: outsourcing is best considered after the shared services organization is operational and the data exists to support objective decision-making capabilities. "You can't outsource something that's broken. You have to fix it first. Shared services centers provide a way to centralize cen·tral·ize v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es v.tr. 1. To draw into or toward a center; consolidate. 2. and streamline certain functions. It's cheaper to do that than to pay an outsourcer to figure out what's wrong," says Donald Janson, director of common administrative resources Administrative resource is the ability of political candidates (and parties) to use their official positions or connections to government institutions to influence the outcome of elections. for Ingersoll-Rand Co. A 1999 International Data Corp. study noted that more than 60 percent of the companies that out-sourced financial processes had shared services organizations that were at least three years old. This "stabilization" period allows the SSC time to reengineer processes and drive out non-value-added costs before turning operations over to an outsourcer. There are exceptions to the rule. Companies in Europe have found outsourcing decentralized processing Computer systems in different locations. Although data may be transmitted between the computers periodically, it implies limited daily communications. Contrast with distributed computing and centralized processing. to a single provider to be the fastest route to achieving the benefits that a shared processing environment can offer. 3. Off Shore Processing: During the next decade, U.S. companies are expected to increase their use of offshore processing to further reduce processing costs. Locations with low labor costs attracting global companies include India, Mexico, Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. and the Czech Republic Czech Republic, Czech Česká Republika (2005 est. pop. 10,241,000), republic, 29,677 sq mi (78,864 sq km), central Europe. It is bordered by Slovakia on the east, Austria on the south, Germany on the west, and Poland on the north. . As increasing numbers of U.S.-based operations look at international sites for part or all of their shared services operations -- a strategy that can result in significant savings --they'll need to recognize that this strategy also comes with increased risks and complexities. On the plus side, many have discovered that the skills exist to perform select work outside of the U.S. Labor costs in India and Mexico can be as little as one-seventh and one-half, respectively, of American wages, and tax incentives can play an important factor internationally when negotiating with various federal, state and local governing bodies Noun 1. governing body - the persons (or committees or departments etc.) who make up a body for the purpose of administering something; "he claims that the present administration is corrupt"; "the governance of an association is responsible to its members"; "he . On the other hand, time zone differences, language barriers and ease of travel to centers are factors that demand consideration. It's clear, that the trend towards shared services for achieving the twin goals of high quality and low cost for non-core processing is a growth business. Brian O'Brien is a partner in Andersen LLP's Chicago office and Scott McReynolds a senior manager in Andersen's Cincinnati office. Each has research and practical expertise designing and implementing SSCs. They can be reached at: brian.j.obrien@us.andersen.com and scott.j.mcreynolds@us.andersen.com
BENEFITS FROM SHARED SERVICES
Reported Annual
Company Business Processes Savings
Knight Ridder Inc. Human resource 30 percent,
functions, general $20 million
ledger, fixed-asset per year
accounting,
budgeting,
purchasing, accounts
payable, vendor
management, payroll
and benefits
administration
processes
Tenneco Finance and 44 percent, more
Automotive Inc accounting, human than $100 million
resources, per year
employee benefits
and payroll,
information
technology and
environmental health
and safety
AlliedSignal Inc. All financial More than $15
transaction million per year
processing
Methods of
Company Other Benefits Achieving Savings
Knight Ridder Inc. Better internal Integrated
controls, greater systems, process
decision support, reengineering,
higher service consolidation
levels and increased and process
purchasing power standardization
with suppliers
Tenneco Eliminated time Reengineered
Automotive Inc that line managers processes, new
spent on company-wide
non-strategic ERP systems,
activities; they consolidation
now focus on of functions and
customers, new data centers
markets, market
growth and new
products
AlliedSignal Inc. Consolidation,
restructuring
and process
reengineering
How Much Is Saved?
Accounts Accounts Fixed Assets General
Receivable Payable (Line Item) Accounting
(Invoice) (Invoice) (Journal Entry)
Fortune 100 $16.00 $8.00 $5.40 $1.10
Mean
SS Mean $7.80 $4.44 $3.75 $0.34
% Savings 51% 44% 31% 69%
per Transaction
Payroll & Travel &
Benefits Expense
(Check) (Report)
Fortune 100 $6.00 $20.00
Mean
SS Mean $2.77 $5.00
% Savings 54% 75%
per Transaction
RELATED ARTICLE: Shared Services: Primary Functions * Accounts payable * Accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying * Travel expenses * General ledger processing/consolidation * Payroll * Fixed assets fixed assets npl → activo sg fijo fixed assets npl → immobilisations fpl fixed assets fix npl → * Cash management and treasury * Compensation and benefits * Credit and collection * Financial analysis and reporting Source: Andersen-akris.com study |
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