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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.

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 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, legal and tax.

Several factors have led to the increase in shared services 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. According to 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 (ERP) 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). EAI enables companies with multiple ERP or custom software platforms to utilize a single financial platform (such as Oracle, SAP, JDE, Lawson) in the shared services center without changing the existing platforms used by multiple operations and business units. EAI leverages a middleware platform, such as MQ Series from IBM, 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 companies such as Ford Motor Co., General Electric Co. and Baxter International 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 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 activities (i.e., accounts payable, travel and entertainment, general ledger). 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?

A common misconception is that shared services is just another name for "centralization of support 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) 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). 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 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 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 -- 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 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 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.

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 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 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 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 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 and the Czech Republic. 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. 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

* Travel expenses

* General ledger processing/consolidation

* Payroll

* Fixed assets

* Cash management and treasury

* Compensation and benefits

* Credit and collection

* Financial analysis and reporting

Source: Andersen-akris.com study
COPYRIGHT 2002 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2002, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:O'Brien, Brian
Publication:Financial Executive
Article Type:Industry Overview
Geographic Code:1USA
Date:Jan 1, 2002
Words:2269
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