Global Shared Services

Service Stations

The scope of functions in shared services centers now goes beyond transaction processing activities in finance. In fact, such centers are breaking through traditional functional silos to become business service hubs throughout the world.

A dozen years ago, a handful of companies began consolidating their finance functions into shared services centers. They reasoned that if you were to handle all your transactions in a single place, you'd greatly reduce the cost of each transaction and save millions of dollars. An additional early goal for many was to move transaction-processing activity out of the controller's department, so the controller could focus on being a business partner providing value-added services.

For many companies today, the focus has shifted from efficiency to effectiveness. In fact, the leaders in the field say there's an enormous wealth of information in the detailed data that can be tapped for significant business advantages.

In this roundtable interview, Bob Cecil, Lee Gregory and Jan Williams of Gunn Partners, a business process improvement consultancy with operations in the U.S. and Europe, discuss the present state and future prospects of global shared services.

Where does shared services stand today?
Cecil: The concept has proven its worth, and the companies that pioneered it are bringing more functions into shared services. For example, AlliedSignal (recently merged with Honeywell), General Motors and Mobil have brought such diverse functions as human resources, real estate and travel and meeting arrangements into their centers. We're also seeing companies increase the value of the concept by integrating their information systems and making end-to-end improvements in finance and other administrative processes. As another way to increase the value of their centers, some companies are working with their internal customers to find the level of service that provides the best overall value, rather than the level that costs the least.

Where does shared services stand in the United States?
Cecil: Most of the largest companies, including 16 of the top 20 on the Fortune 500, have established shared services centers for handling transactions. Companies too small to set up their own centers are looking into alternatives like outsourcing and joint partnerships. The Big Five accounting firms and a number of banks have begun offering outsourcing services.

How does Europe stand in comparison with the United States?
Gregory: Europe is still trailing the United States. The common thread of most European companies with successful shared services centers is their pursuit of a pan-European business model. Such companies want to redefine themselves as European rather than as Dutch, English or German. This pan-European vision helps them overcome age-old barriers of language and culture. Companies with this pan-European vision are having success in setting up shared services centers. For companies without this unifying vision, the record is much spottier. Implementing a successful shared services center requires the wholehearted support of all national business units. If they don't buy into the idea - and many don't - they're in a position to delay or even sabotage the implementation.

Is the economic turmoil in Asia affecting the development of shared services centers?
Williams: Right now, most Asian companies are just trying to survive; they aren't even thinking about shared services centers. Australia and New Zealand are a different story. They're moving into shared services very quickly. Most large enterprises - those with $5 billion or more in revenues - are following U.S. models. These companies have the economies of scale to pursue consolidation with just one to three processes. But it's a different story for smaller companies - those with $1 billion to $4 billion in revenues. Because they lack the scale to justify a shared services center for a single function, they tend to be more aggressive in rapidly bringing functions like human resources, IT and procurement into shared services.

What about the rest of Asia? Will it follow the European model?
Williams: The Asian market is quite different from Europe. There's no pan-Asian business model comparable to the pan-European model. Shared services centers face obstacles of language, nationality and culture, as well as enormous differences in infrastructure. To add to the challenge, some Asian countries have laws that make the establishment of shared services centers very difficult, such as requirements that source documents remain in the home country. Some American multinationals are making shared services work in Asia. Hewlett Packard and Motorola have centers in Singapore. Hewlett Packard is planning a center in India, and American Express already has one there. But for Asian-based companies, it's another story. Outside of Japan, Australia and South Korea, few companies have the critical mass to justify consolidation.

Once Asia comes out of its economic funk, what model are the large companies likely to adopt?
Williams: One model that can surmount the barriers of language, law, nationality and culture is the hub-and-spoke approach, analogous to the operating pattern of many airlines. In this method, the bulk of the staff work would be processed in hub locations, but some critical activities along with source documents would remain at the local business unit to meet legal and other requirements.

Why aren’t there shared services centers in Latin America?
Cecil: Political instability, poor transportation systems and notoriously bad telephone service make Latin America unattractive for shared services centers. Instead, many companies are consolidating Latin American support activities outside the region, often in Florida where the infrastructure and access to language skills aren’t issues. Still, several multinationals with a presence in Latin America are looking into the advantages of setting up centers there. Mexico, with its improving infrastructure, comparatively stable government and low labor costs could soon become an attractive target.

What companies are seen as the pacesetters?
Cecil: Ford and General Electric are two of the most remarkable. Year after year, they’ve continued to consolidate and to amass benefits. Over the past 17 years, Ford has reduced its worldwide finance headcount from more than 14,000 to about 3,000. This finance organization supports some 300,000 Ford employees and $125 billion in sales. Since 1988, General Electric has cut its transaction staff in the United States by 75 percent. Yet this much smaller staff is now providing analytical insights to the business, as well as low-cost administrative work.

What happens after the initial benefits of consolidation are gained?
Cecil: It takes most companies five years to seven years to complete a consolidation and start to gain the full benefits of lower wage rates and economies of scale, after which the gains start to flatten out. One way to keep the gains flowing is to move beyond consolidation to process improvement and information integration.

Can’t companies gain these benefits without consolidating?
Cecil: Trying to gain the benefits without actually going to shared services can be risky. A number of companies that tried that route found they weren’t getting the benefits they had hoped for, and had to take a step back and implement a consolidation.

Why can’t you consolidate and improve processes at the same time?
Cecil: Actually, doing both at the same time is the best way. Companies that have followed this approach say you gain more value more quickly. Also, despite the difficulties, it’s easier to implement such changes in processes during rather than after the consolidation.

How important are labor costs in planning shared services centers?
Williams: Labor costs are the driving force behind consolidation. Moving to low-wage areas is the easiest way to cut costs. Improving processes is much more difficult, although it does offer more potential savings.
Gregory: In Europe, establishing truly European operations is the imperative. Most companies are still completing their initial consolidation and have yet to turn their attention to improving processes.

Are restrictive labor laws and regulations an obstacle to shared services?
Gregory: Not in the United States, but they do present obstacles to shared services in Europe, especially in Italy, France and Germany.

Aren’t countries that discourage shared services centers putting their companies at a strategic disadvantage?
Gregory: Since much of the employment in these countries is provided through large national companies or smaller local enterprises, these restrictive laws aren’t viewed as imposing strategic disadvantages.
Cecil: In terms of the savings involved, they’re correct. Savings from shared services typically amount to about 1 percent to 2 percent of total sales, not enough to create a strategic disadvantage. However, the real competitive gains these countries are forsaking come from the ability of shared services to provide standard information across national boundaries and through the entirety of a European business. Nowadays, this is almost a requirement to operate successfully in the new European economy. Countries with laws that restrict the ability to do this are putting businesses operating within their boundaries at a distinct disadvantage.

Can we expect to see a single global center handling the bulk of the administrative work for a giant American corporation?
Cecil: Union Carbide has a single global site for the United States, Europe and Latin America, and other companies - including Dow, American Express and Microsoft - have standardized processes globally, though they haven’t consolidated them at a single site. Clearly, the single global site has attractions. Having all transaction information standardized worldwide at a single site makes it easier for management to make strategic decisions. However, the same goal can be accomplished from multiple sites, provided the information is standardized.
Williams: The idea of a single global center for all administrative functions sounds like the perfect answer, but such consolidation is impractical for most large companies. The problem is one of optimum scale. It takes a minimum of about 100 people to make a center worthwhile, and a company can keep benefiting from economies of scale up to about 600 people. Past that point, increases in size tend to become counterproductive as bureaucracy takes root. So a global center makes sense if it isn’t too big. If it grows too large, the solution is to simply build another center. This multiple-center approach also avoids the difficulty of retaining skilled staff with appropriate language skills to support operations in remote time zones. Otherwise, staff members might be permanently working outside normal local business hours.

What if a company is too small to build a shared services center?
Williams: That’s the case in most of Asia. It takes considerable scale to justify establishing a shared services center, and most companies fall far short of the minimum scale required. Yet some companies have ignored this handicap and established centers anyway. In Australia and New Zealand, there are a number of centers with 100 or fewer employees. To address their scale problems, such centers have some options. They can invite other companies to join them in joint ventures or consortiums, or they can market their services to companies seeking to cut costs by outsourcing their administrative transactions. Outsourcing is arousing considerable interest in Australia and New Zealand.
Gregory: Some European companies are also turning to joint ventures, consortiums and outsourcing. Shell and Ernst & Young have formed a 50/50 joint venture called Tasco that’s intended to provide all the accounting for Shell’s downstream business in Europe. Parts of British Petroleum (now BP Amoco), the BBC and some units of Unilever have taken the outsourcing route.

Why not just outsource? Why go to the risk and expense of developing a shared services center?
Cecil: Outsourcing offers a tantalizing alternative to setting up a shared services center. Yet companies that have taken that route warn that costs can prove higher than expected. Most outsourcers demand that customers do transactions their way. If customers ask for something non-standard, they pay a special charge. As one executive puts it, “They sell plain vanilla and make their money on special charges.” Some outsourcers promise to cut transaction costs sharply, say by 30 percent, with the understanding that any savings beyond 30 percent will be retained by them. Under such an agreement, if the company’s transaction costs are cut 90 percent, the outsourcer gets two-thirds of the savings. Of course, companies can re-negotiate agreements.
Gregory: Another consideration is whether companies are willing to risk the value of the information inherent in their processes by letting someone else control them. Are the cost savings worth it? Perhaps for a smaller company, but probably not for a larger one.

What about small companies? Wouldn’t outsourcing help them?
Williams: Outsourcing might be the only practical way for smaller companies to take advantage of shared services. Also, as more accounting firms, banks and other entities begin offering outsourcing services, competition should drive down the costs and force providers to share more of the benefits.

What’s the next big development in shared services?
Cecil: When it comes to processing transactions, many companies agree the ultimate goal is to make them disappear. They see this as the next great step in transaction processing, and call the approach the distributed or virtual model. In it, business processes are designed so administrative work is performed as part of another business process. An example is the pay-on-receipt idea, in which the price to be paid to the supplier is based on the quantity of goods received and the pricing in a central database. While goods are logged into the computer as received, the whole accounts-payable process is taken care of automatically. With this model, administrative transactions are “distributed” throughout the company and built into other processes. Standard transactions are handled automatically. Only exceptions are dealt with by the staff.

Gunn Partners recently completed a research project that analyzes shared services among 50 centers for 35 large international organizations on four continents. For more information on the global shared services research project, contact Mike Hostetler, project leader, at mhostetler@gunnpartners.com, or visit www.gunnpartners.com.