What are shared services?
Shared services are the consolidation of specific activities within country, regional or global centers to achieve specific objectives, most commonly cost reduction related. SSCs primarily cover high volume and routine processes and activities that are relatively standardized. Therefore it is not surprising that the first activities that organizations’ consider outsourcing are back office finance processes and IT services. Those organizations demanding faster payback and greater cost reductions are often more adventurous in the activities that they are prepared to move to shared services. They may also engage a third party to deliver those services to achieve further savings.

In embarking on SSCs, the model is built upon three key principles: consolidation, standardization and re-engineering. It is necessary to reduce the number of locations where the activities are performed, standardize the activities, policies and systems to enable centralization and to re-engineer to achieve optimal, best in class processes. A degree of re-engineering is performed prior to implementing SSCs but refinement is often necessary to further unlock the potential benefits available.

The motivations
Since evolving during the 1980’s, shared services has gained significant prominence for a number of reasons. Pressure on organisations to reduce costs and improve financial performance have forced management to seek new opportunities to reduce their cost base while maintaining or improving the quality of service provided to business partners. The increase in large scale IT projects to provide common systems and platforms to support business operations, many of which were driven by Year 2000 concerns, have provided a solid technology foundation on which shared services can be developed. The intense focus on corporate governance and the requirements forced on businesses to comply with Sarbanes-Oxley have necessitated management to ensure that minimum standards of controls are operating in their markets, irrespective of the location.

While cost savings is often the main driver for implementing an SSC model, it is not the only reason. The key drivers include:

reduce administration costs;

reduce headcount and payroll costs;

increase efficiencies through higher productivity and centralized expertise;

improve internal and external service levels;

standardize services and activities across geographies;

improve internal controls through standard processes, controls and supporting systems;

provide a flexible platform for growth and change.

The cost savings from implementing shared services can be significant, with cost reductions of 25-40% not uncommon. Addition savings may be possible through outsourcing but these should be weighed against the associated increase in risks through engaging a third party. While a small number of organisations can realize payback within one year, the typical packback for an SSC project is one to three years.

What Shared Service models are available?

In-house SSCs
Organisations may choose to implement shared services nationally, regionally or globally. In the past, businesses could make the transition through each level, establishing national SSCs in different activities to consolidate activities and subsequently rolling these into regional or even global centers of excellence. In this option, the organization retains ownership for the delivery of their end-to-end processes and is in control of managing the project and service delivery risks.

Outsourcing
With the increasing prominence of outsourced shared services, organizations coming to shared services somewhat later are able to bypass the national, and sometime region level, by engaging a third party to deliver these services. While creating the opportunity for further cost reductions, this can be a step too far for organisations that are reluctant to relinquish control and become just another customer to their service provider, especially for “sensitive” financial activities and controls.

Traditionally outsourcing enables the third party service provider to achieve further cost savings through their choice of location and economies of scale gained by delivering these services to multiple customers. Part of these savings can then be passed on to the customer.

With outsourcing, processes are divided between the organization and their service provider, with both parties responsible for ensuring the seamless alignment of end-to-end processes. The company is therefore dependent on their third party service provider to deliver against the agreed levels of service to ensure the objectives are achieved, which can be a challenge when you are only one of several customers dependent on the provider.

Off-shoring and near-shoring
These can be applied to both in-house and outsourced SSCs. Off-shoring focuses on leveraging the global labor market by performing services in lower cost countries to further drive down costs. Locations included countries in Central and Eastern Europe as well as India and China. A variation is near-shoring where activities are performed in closer proximity to reduce the distance and overcome difficulties with time-zone differences. Many third parties are now using a combination of near-shoring with off-shoring in India and China to obtain the best of both options.

An additional benefit that may be available to organisations is inward investment incentives on offer by agencies for establishing business operations in their country.

What to include in shared services
The decision of what activities could be included in the SSC is very much down to how far the organization is prepared to go to achieve cost reductions and efficiencies. However, the preferred SSC model adopted will have a significant impact on this decision, as outsourcing initiatives tend to be more conservative.

As can be seen above, for many organizations the preferred and risk averse approach is to implement the most routine activities first (AP, AR, GA, T&E) and then transition in further activities once the initial pilot has proven successful. This defers realization of the potential benefits but is often necessary to alleviate market managements’ concerns and obtain their support for the initiative. This is especially true for those activities which have a direct impact on their trading partners, particularly customers.

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.