The process for implementing Shared Services
Embarking on a Shared Services project is a significant exercise and should be approached in the same way as an organization would when implementing a large scale transformation or IT implementation project. It is essential to implement a structured process for the program, supported by a robust governance structure if the project is to be successful with objectives achieved, benefits realized and all key risks managed effectively.

The country selection should be made through a formal location analysis as part of the feasibility study. In the same way that you would perform a formal evaluation of potential Enterprise Resource Planning solutions prior to selecting which system to implement, it is essential that an in-depth evaluation of potential countries is performed to ensure that all key factors are given appropriate consideration and that the final decision is based on a country’s overall performance against all key criteria. Some organisations adopt a formal scorecard system for the evaluation, with higher weightings assigned to the most important factors.

What to consider when selecting a location?
When selecting a location for an SSC, there are a number of key factors to consider. It is important to undertake a formal evaluation of the preferred countries to ensure that adequate research is performed and adequate data gathered to support decision-making. These factors can be grouped in to the following areas:

Internal factors
Management may prefer the proximity of the SSC to be close to the organization’s head or regional office or to existing operations. SSCs or centers of excellence already established in a specific country may provide a platform for expanding the activities and geographies covered by those business units. Corporate social responsibility is gaining an increasing profile and management may have to determine whether the choice of location will have an impact on the corporate image of the organization, e.g. the perception of exploitation of workers in poor countries. In addition, significant headcount reductions in developed markets may have a negative impact on the organization’s image.

Scope of activities and geographical coverage of the SSC
Whether the SSC is in-house or Third Party will have a significant bearing on the choice of location, with Third Parties often using an off-shoring model with a combination of near-shore operations complimented with off-shoring in secondary countries such as India and China.

Regional or global SSCs place an additional constraint of time zones which must be addressed to ensure service levels are achieved and responsiveness is adequate. Back office focused or interaction with trading partners may influence management’s decision, especially if there is a concentration of customers or suppliers in a specific country or region. Some organisations, especially Business Process Outsourcing (BPO) service providers are adopting a ‘follow the customer’ strategy by establishing operations in new locations shortly after key customers have done so.

Operational cost factors
Direct costs such as total labor costs (labor and social costs, employee benefits, recruitment and training costs, etc.), cost of facilities, utilities, telecommunications, etc. must be included in the business case. These are often the primary driver for SSC initiatives.

Labor factors
There are many aspects to consider in respect of the labor market. Key considerations include availability of skilled labor, including unemployment rates; number of existing SSCs operating in the location; productivity rates; foreign language skills; employee attrition rates and absenteeism levels. Other considerations may include accessibility of work permits for foreign employees and the complexity and rigidity of employment legislation.

Taxation and subsidies implications
Taxation implications (direct and indirect) will have an influence on the choice of location, especially the implications of transfer pricing and cross border recharges.

Grants, subsidies and assistance may be available for job creation, inward investment, training employees and will help improve the business case. Consideration must also be given to costs for exit should the organization decide to relocate from the country at a future point in time.

Infrastructure and logistical factors
The quality and availability of appropriate facilities, including office space and leased premises, should be considered, taking into account any future expansion plans for the SSC. The extension of services or countries supported by the SSC could realistically require growth of over 100% in several years. Reliable communications is also important, including telephone and postal services, with IT requirements and service ability key factors in ensuring service levels are achieved.

Proximity to airport and flight schedules to specific countries, e.g. head office and key markets supported by the SSC, may also factor in the decision, as may the quality of roads and rail services.

Socio-economic factors
The economic growth and inflation levels (historic and projected) will significantly influence the business case and potential benefits available, as could the stability of the currency. The level of investment in education and the levels of graduates will also be important in ensuring the continued availability of educated and skilled staff to address staff attrition and satisfy expansion plans.

Geo-political factors
The stability of the government and the proximity of elections may feature. Consideration may also be given to the stability of neighboring countries. Local levels of bureaucracy and speed in implementing changes could be an important factor, especially where flexibility and responsiveness of the SSC will be necessary.

Other factors
The perception of key trading partners to the location may be a factor, especially when moving to a low cost region. The attractiveness of location for foreign employees is vital where significant levels of internal transfers are required. Failure to attract the organization’s best employees will reduce the likelihood of success of the program. Data protection and privacy laws may also be included in the assessment criteria.

Choosing the location
The process for selecting the location is relatively intuitive and follows the pattern of most due diligence exercises. Planning should include establishing a team with the right skills to perform the evaluation, supported by experienced local and technical specialists where these cannot be obtained from within the organization. Initial data collection could include information provided by local operating units as well as market research and country evaluations performed by external organisations. This may then provide the opportunity to prepare an initial shortlist of potential countries which are then visited by the team. Following the site visits, all key data will be analyzed, all relevant costs and benefits identified and quantified and the high level business cases refined. A management workshop will most likely follow to obtain final internal perspectives on the options available. The final model, detailing SSC structure, country evaluations, the road map for implementation and costs and benefits analysis are then presented to senior management for final selection.

Site visits
When evaluating the locations, it is essential to perform country visits as part of the data collection process. While it is likely that a certain amount of information can be obtained from management of local operations, in most cases site visits to selected parties can provide invaluable insight into the merits and disadvantages of a country. Parties to consider visiting include:

Established Shared Service Centers (and selected customers where it is a Third Party SSC) to share their experiences by obtaining insight into the challenges in establishing, maintaining and expanding their operations, their ability to achieve service level targets and benefits realization, etc.

Government or related agencies to discuss the potential grants, incentives and tax breaks available and any associated constraints and conditions for obtaining these.

Local auditors and professional advisors to obtain their view of the local market, the suitability of the country for the intended SSC operations and the key barriers that must be overcome.

Local recruitment agencies to obtain insight into the local labor market and the availability of short and long term resource requirements.

When performing the country visits, it should be borne in mind that most parties visited will be promoting the location. It is therefore important to obtain corroborative evidence to validate assertions and opinions at the end of the visit.

Current trends
The popularity of locations such as India have received extensive press coverage in the last couple of years. However, as the main cities of Mumbai, Bangalore and Dehli become saturated with SSCs, organisations are considering alternative lower costs locations in India and beyond. China and the Philippines are becoming more attractive options as increasing labor costs erode the potential benefits available and weaken the business cases for established locations. Locations in Asia are proving especially attractive to BPO service providers who establish near shore operations in lower cost locations in Europe and the Americas and off-shore operations for back office activities in Asia.

In Europe, SSCs are moving east. As locations in western Europe become more expensive, cities in Eastern Europe are becoming more attractive. Czech Republic, Slovakia, Hungary and Poland have all seen a dramatic rise in the number of SSCs operating in key cities in recent years and EU membership is only increasing their popularity. These countries regularly compete against each other to be the preferred location. Higher incentives and subsidies for locations outside the capitals are often available and operational costs can be substantially lower. However this does not seem to be impacting the allure of the capitals with most companies seemingly preferring the accessibility of the major cities.

Central and Latin America lags behind other regions, with the main players being Brazil, Mexico, Chile and Costa Rica who are particularly attractive to US companies, as well as locations in Canada. Political and economic stability, telecommunications infrastructure and availability of foreign language skills are the primary constraints but this is beginning to change.

Irrespective of the locations short listed, it is important to undertake thorough due diligence to ensure the evaluation is based on adequate, accurate and current information. The risks associated with such a transformation program are significant and must be managed proactively and effectively to ensure achievement of goals. In the final article in this series, we will discuss the risks and challenges an organization faces when implementing a Shared Service Center.

David Scott is a senior manager with KPMG Czech Republic with over five years experience in supporting audit and advisory clients on shared services projects.