For well over a decade, organizations in both public and private sectors have been leveraging Shared Service Center models to drive costs out of back office operations, drive business process standardization and achieve a higher degree of control / visibility into operations. Although some variation in projected benefits of the Shared Service Center approach exists, there seems little doubt that, when executed properly, Shared Service Centers can have a dramatic impact on productivity.
Projected Benefits of Shared Service Center Model
- Functional cost improvements up to 60% from baseline
- Savings of between 30% and 50% on the processes in scope
According to Bain and Company, other potential benefits include, “Freeing up employees to spend more time and resources on their core jobs; Providing flexibility to quickly add new business units and expand geographically; Enabling rapid integration of new acquisitions.”
All of this sounds very appealing. However, in the domain of business transformation projects, a significant gap exists between theory and execution.
In order to justify the considerable capital outlays and disruption to operations that accompany a major business initiative like a Shared Service Center project, most companies prepare a business case. Whether or not the business contains a hard ROI projection, the business case will almost certainly attempt to justify the value of the project in terms of:
- Costs, consisting of external consulting services, technology acquisitions, internal resource consumption, staff reorganization, etc.
- Benefits, generally in the form of a lower cost basis for an ongoing business activity, realized through some combination of improved labor unit costs, eliminating redundant activities and achieving a higher degree of productivity, the latter brought about through business process standardization, centralized management and investment in technology to increase business process automation.
In order for the full value of these projects to be realized, a number of things must go well (stated more formally, there exist a number of critical success factors).
For years, IT Convergence has helped US-based multinational companies to undertake large transformational projects at both regional (e.g. Latin America or Asia) and global scales. Along the way, we have identified a number of common “Value Leaks” – pitfalls that present potential roadblocks to realizing the value of major business transformation initiatives.
Value Leak #1: Inefficient transaction processing
At a large scale, the time required to complete each individual transaction matters. A Corporate Controller initiating a finance Shared Service Center project might be faced with a “current state” wherein each individual factory across the USA processes its own AP and payroll. The resulting heterogeneous business processes, duplicated effort, high rate of errors and lack of centralized visibility / control are all compelling reasons to consider a Shared Center Model. However, the flip side of consolidating a large number of transactions to one centralized back office operation, whether or not that operation resides at one geographic location, is that any transactional inefficiencies are multiplied many thousands (or millions) times over.
Many powerful “Tier 1” enterprise applications are powerful transactional engines that do not always place a premium or streamlined / intuitive user interfaces. The symptoms of this problem can include users having to click or tab through a large number of unnecessary fields in order to execute a routine transaction, or having to log into and out of multiple application screens to complete a business transaction. Part of the solution to this issue is realizing that transactional inefficiency is not simply a nuisance, it is a drag on corporate profitability. Viewing transactional processing through the lens of Time Driven Activity Based Costing is one way to drive home the message that inefficient transaction processing comes at a cost. In order to streamline transactions without customizing the underlying transactional system, a good option might be implementing a lightweight, web-based interface for Oracle E-Business Suite, such as CloudIO.
Value Leak #2: Missed Requirements
Failure to capture key requirements from business units or geographic regions can result in erosion of project value. One of the goals of a Shared Service Center project is to create set of standard business processes that can be used to serve a number of different constituent internal customer groups. These projects will require a degree of analysis to arrive at a set of common business processes that can meet the needs of the different internal customer communities.
At the same time, a critical success factor in a Shared Service Center project is not overlooking the unique variations on the standard business processes. This consists of both knowledge of the unique local, regional or business unit requirements, and determining whether those variations will be addressed in the shared service center or will continue to be addressed at the local/regional/business unit level. Examples include:
- Financial Shared Service Centers that incorporate Chinese facilities may need to comply with tax law as established by the PRC
- Financial Shared Service Centers that involve Mexico may need to comply with the relatively new accounting regulations imposed by Mexico’s SAT
- Human Resource Shared Service Centers will need to account for how to work with various payroll providers across the globe.
- Many types of business processes are impacted by Brazil’s unique requirements, which impact everything from shipping documents to invoice processing
Failure to capture key requirements in the project scope can result in a number of undesirable outcomes, starting with the well-known: “More funding? You’ve got to be kidding!” Missing important requirements can result in unplanned costs increases to the project. Hopefully, the drama will not approach this level of conflict, but as the cost of the project increases, the business value is eroded. Even though most concious budgets include a small percentage for unanticipated requirements, large scope changes will definitely raise the visibility of the project (turns out that there actually is such a thing as bad publicity), cause financial pains for the company and lack of confidence in the project team.
When critical business requirements – such as those required by law – are not possible using the solution rolled out within the Shared Service Center project, this can cause employees to work outside the system, a phenomenon known as “Hidden Factories.” This type of value leak is often more insidious – on the surface, the system is accepted and people are now incorporating it into daily business activities. However, below the surface, there is work getting done by other (typically more manual) means. Spreadsheets are circulating through email. Reports are being prepared by hand. The value of the system is being eroded because the anticipated benefits of the system – productivity gains – are reduced. This may also contribute to change management issues.
Value Leak #3: Failure to Address Change Risk
Change Management is a “soft” risk that can sap the value of a Shared Service Center project through increased costs AND reduced benefits. Shared Service Center projects generally involve moving a set of business processes from one “place” to another. This often involves a geographic relocation of functions, but even absent the geographic change dimension, the normal way of doing things will change. This change can bring about confusion and erosion of value, driven in some cases due to problems within the functional areas delivering the services and in other cases by issues involving internal constituents who are intended to consume the services (“internal customers”).
With regards to employees involved with delivering the impacted business processes, it is not uncommon for Shared Service Centers to result in some job losses within in the company and certainly existing reporting structures / power structures are likely to change. As noted by a research report published by the UK’s Certified Accountants Educational Trust, Shared Service Center projects can lead to a variety of fears within the organization, ranging from concerns about losing importance within the company to a more generalized fear of the unknown .
These fears can result in a slew of non-productive behaviors. Key employees may half-heartedly participate in the project, a behaviour which can easily compromise the definition of business requirements and slow the pace of system deployment. In extreme cases, valuable employees may become demotivated and leave the company, degrading the knowledge base and transaction processing capability of the organization at precisely the time when skilled and experienced employees are most needed.
One of the more common change issues is that the employees responsible for transaction processing within the Shared Service Center simply do not have a strong grasp of how business processes are to be executed or know how to transact with the new system. Solutions may range from custom training materials to self-service resources produced by Oracle User Productivity Kit that give users the ability to solve many routine system and process questions on their own. This is important because large volumes of inquiries to the corporate help desk or simply turning to coworkers for help can reduce productivity and thereby diminish the value of the Shared Service Center solution.
It is important to also consider the perspective of the internal customers that are expected to work with the Shared Service Center employees. Instead of walking over to a nearby office cubicle to request an HR report or requisition a new laptop, employees may find that they are now dealing with people in a different time zone that they have never worked with before. Having a good communication strategy to inform internal constituents of the change that is in store early on in the process is important. This can be accomplished through town hall meetings, lunch and learn meetings and more formal communications. Many people ignore corporate communications until the moment that they are actually trying to accomplish a task that now involves a new way of doing things. Consequently, making sure that internal customers know how to get things done is extremely important.
Join Our SSC Webcast Series!
Over the course of the next few months, we will be delivering a series of webcasts and on the Shared service Center’s needs and strategies to overcome the “value leaks”. During the campaign we will present the main issues these organizations share and how IT Convergence’s fully integrated service portfolio can help achieve their full value. View the full campaign schedule and resources here.