Making Non-Revenue Producing Business Functions 'Profitable'

A shared services model concentrates company resources performing like activities, typically for the entire organization, in order to service multiple internal partners at lower cost and with higher service levels, with the common goal of delighting external customers and enhancing corporate value.

With the shared services model, corporations organize administrative, financial and other transaction-oriented activities into standardized services centrally provided by a single entity - a Shared Service Center. This reduces the administrative burdens placed on individual business units so they can focus on their core competencies while ensuring that standard business processes are used across an organization. The goal of the shared services model is to reduce costs, improve user satisfaction and standardize business processes. Additionally, Shared Service Centers significantly improve information access and quality, as they are and built on standardized business processes and integrated data systems. This is critical in 2003 when chief financial officers must certify the performance of diversified holdings around the world.

In this article, I will address the opportunities and challenges of moving to a shared services solution.

The Shared Services Model Benefits
Who can profit from shared services? While shared services discussions tend to focus on multinational companies with geographically dispersed organizations, many domestic companies also have disparate business structures. While larger organizations stand to benefit the most from Shared Service Centers any mid- to large-sized company can benefit from centralized financial planning, reporting and administration.

The problem is that many companies, large and small, still operate as fiefdoms. Each business unit or location has its own customized (or tailored) IT solution as well as processes and procedures. With this fragmented culture, it can take days, or even weeks, to collect and analyze financial information about the company's overall performance. Without standard business practices, the findings can be misleading, as different business units typically use different accounting methodologies, data consolidation methodologies, and reporting criteria (i.e., a 60-day versus 30-day reporting cycle).

But the benefits derived from consolidating services are multifold. Standardized processes allow companies to work with seamlessly integrated and consistent data. As a result, they can begin to manage business activities as complete, end-to-end process. When an organization can track how work is accomplished, it can identify what steps can be automated or will support self-service. As services become automated, financial managers and administrators, both in the local business units and at the Shared Service Center, can spend more time on high-level analysis and planning, and less on 'paperwork' and non-value added processing steps.

Streamlining operations also can translate into significant cost savings. According to industry expert Andrew Kris, companies that implement Shared Service Centers experience initial savings of 20% to 30% through the elimination of redundant personnel, tasks and infrastructures. Average savings can reach upwards of 40 percent with automation of transactional activities and self-service solutions, he further posited in akris.com, an online publication dedicated to shared services.

There are significant gains in operational efficiency as well. With a centralized delivery infrastructure, service updates and additions only have to be implemented once, and the changes are instantly available to all users of the system.

While the benefits are great, shared services are not a 'quick fix.' There are several changes that must occur within an organization to realize the full benefits of a Shared Service Center. Let's examine the steps involved.

Standardize the Processes
When planning a move to a shared services model, companies should begin by standardizing the business processes. For a domestic company, this is fairly easy to do since the in-country regulations and business practices will be consistent. For a multinational company, business practices and regulations vary around the world.

Our advice is to start at the top-line. Determine the best practices for your company, and then develop a set of common business processes to support those practices. Next, model the function to identify the universal elements. Take procurement, for instance. Regardless of whether a transaction is conducted in English, French or simplified or traditional Chinese, the procure-to-pay business flow typically involves a requisition form, supplier selection and negotiation, contract management, order fulfillment and shipping, and expense processing.

But, what about the local practices that remain - the forms and procedures that are required in one country of operation, and not in the others? The shared services model accommodates both the centralization and decentralization of services. Centralized tasks suited for standardization are performed at the Shared Service Center, while decentralized tasks, dictated by in-country statutes- reporting procedures and local business practices - are performed in the country or the individual business unit.

Standardize the IT Infrastructure
While the case for shared services is compelling, many companies have a huge hurdle to clear: aging legacy system. To provide centralized services from a Shared Service Center to multiple locations, IT integration must occur in addition to process standardization. In fact, many companies embark upon IT integration/centralization first, and later address standardizing processes. It is up to each individual company to determine which course is best.

One of the main reason to standardize and centralize IT infrastructure is the reduction of expenses related to creating and maintaining a client server/server, distributed IT software and hardware system. By consolidating servers worldwide, centrally implementing one set of internet-computing applications, and standardizing architecture and peripherals, companies achieve higher productivity with less resources and experience economies of scale.

A more important reason for consolidation, however, is that consolidating systems makes the information available globally. Information entered into the system is instantaneously available globally, and can be analyzed at both a local and global level. And with consistent business processes throughout the enterprise, the information can be gathered uniformly, with consistent quality of information. Simply put, all applications, business units and Shared Service Centers across an organization can utilize the same data as a single source of truth.

Execution
The next step in the process of moving to a shared services model is to execute the plans, which requires consolidating databases and moving local business units onto the shared services infrastructure. The number of instances varies depending on the enterprise business model, but the fewer instances the lesser data manipulation is necessary.

This does not happen in one fell swoop. In fact, the process usually happens in stages, progressing in intermediary steps. When dealing with scores of databases scattered in the U.S. and abroad, the goal should be to reduce the number of instances in manageable sections. Similarly, not all local business units will be rolled into the Shared Service Center(s) at the same time. For instance in Europe, you might consider consolidating data centers first by country. Remember, however, that any intermediate instance must be consistent with the template of the final consolidated model in order to make consolidations progressively easier.

While domestic companies can usually manage with a single Shared Service Center, multinational companies may need to establish more than one center. To identify the best strategic locations, we recommend conducting an analysis, focusing on geographical considerations and economical analysis.

First and foremost, a short list of locations should be created based upon an analysis of regional variables such as the political stability, economic stability, and currency stability. Once that short list has been created, economic variables like occupancy costs, telecommunication costs and utility costs; operational variables like tax rates, the availability of external IT support services and time zone compatibility; and workforce and lifestyle characteristics such as the availability of skilled, multilingual labor, labor productivity rates and cost of living comparisons should all be considered.

To be effective, Shared Service Centers should operate within compatible time zones to the business units they serve and center personnel must have the requisite skill sets (i.e. language, cultural sensitivities), in addition to a working knowledge of the regulatory laws and practices within their sphere of operation. From an economic standpoint, the company will want to build Shared Service Centers in locations with large pools of skilled laborers at competitive salaries.

Finding the Right Technology
As you can see, executing a Shared Service Center strategy can be a daunting task. And key to this task is choosing the right technology infrastructure. To achieve the maximum benefits, the software the company deploys should provide global capabilities, offer insightful business intelligence, automate entire business flows, and offer a variety of self-service applications, for both employees and trading partners.

The software solution will need to accommodate both centralized management from the Shared Service Centers and decentralized needs from the local business units served by the Shared Service Center. Therefore IT professionals should contemplate 'global' characteristics of the software suite, and ensure the solution can manage functions such as government regulations, multiple country regulations, languages, currencies, and business practices. In short, the system must have international flexibility.

Today's scaleable, open-standard database platforms can support a global enterprise from a handful or even one centralized data source. Leading business application software solutions offer automatic translations of multiple languages and currencies within one database. That same software should also support cross-departmental business processes, identical to the ones your Shared Service Center will be operating. For efficient and complete standardization to happen, the enterprise software suite should support complete business process workflows.

In addition to global capabilities, the solution should provide business intelligence that spans all areas of the business. By documenting facts via performance-based metrics, such intelligent software is imperative for local units and Shared Service Centers to answer critical business questions, such as corporate and personal objectives, but also to deal with exceptions through continuous performance evaluation. The business intelligence delivery mechanism on personalized portals must be flexible, ensure proper security at any management level, and provide real-time information in a large variety of formats.

Another big breakthrough in cost-savings from Shared Service Centers comes through self-service applications, combined with a software solution that supplies highly developed transaction automation capabilities. Self-service applications should be implemented to enable Shared Service Center users to initiate and perform online tasks 'anytime, anywhere' using a browser or mobile device. With an automated function like online procurement, employees are empowered to make pre-authorized desktop purchases, and the system automatically creates a purchase order and transmits it to a preferred supplier. By establishing supplier portals via an extranet, the vendor can automatically enter the order and produce and transmit the necessary documents. With this closed loop system, the invoice is automatically approved (against set tolerance levels), electronically paid and the transaction is automatically reconciled in the system.

Given all that needs to be considered when making technology decisions for your shared services model, you should conduct a company-wide technology audit to understand the deployment of resources, and what compatibility and integration issues exist. Your IT professionals also should evaluate software solutions to identify what new features and functions are available. The key assessment factors should focus on global functionality, the availability of insightful business intelligence, the ability to automate entire business flows, and employee and partner self-service capabilities.

Measuring the ROI
Once established, the Shared Service Center should become a center of processing excellence and innovation. With dedicated personnel and resources, the centers operate as an independent business. Like any business unit, the centers are held accountable for their charter and responsibilities, and therefore, benchmarked and rewarded on their ability to automate and improve service quality.

We advocate organizing the Shared Service Center(s) around an 'outsourcing' agreement. The center pays for itself by allocating costs back to the serviced business units, based on percentages calculated from transactional volumes, sales and the like. This fee structure incents the centers to continuously improve operations since they must answer to their internal 'customers' for the cost, quality and speed of their services.

This approach in essence turns non-revenue generating financial and administrative functions into an independent business unit, with its own P&L responsibilities. Since the other business units pay for these services, the Shared Service Center offerings should be competitive with professional market services. The only way to ensure this is to benchmark the Shared Service Center's progress, and run it like an independent business entity.

This requires a shift from traditional profit and loss accounting to activity-based management. You can and should look at the cost of performing a specific activity, such as processing invoices or answering user inquiries. The reason is twofold: first, the costs of these individual services are distributed among the business units served; secondly, it gives you an accurate measurement to analyze performance and determine how to run each service more cost- efficiently.

As with any business unit, you also should establish meaningful targets. For example, Shared Service Centers can issue Service Level Agreements (SLA's) to the national offices that they serve that would cover services, service levels, reporting structures and support. To monitor their progress, the Shared Service Centers can provide monthly balanced scorecards using the Key Performance Indicators (KPI's) specified in the SLA, such as per-activity transactional volumes and the attendant costs.

The End Goal: Profiting from Non-Revenue Business Functions
In summary, the shared services cannot succeed in a vacuum. The model requires a commitment from the company leadership to consolidate data and standardize business practices across the enterprise. The Shared Service Centers must be given the autonomy, resources and responsibilities to provide centralized hubs of competitive, processing services. For corporations looking to leverage the fiscal advantages of business automation, shared services represent a long-term solution for operating smarter business with better data, more efficiently and at lower cost - making non-revenue business functions a source of 'profit.'