IT Focus - Share and share alike

To hear IT consultants tell it, the rapid expansion of shared services is great news for finance departments. Companies consolidating their finance, IT, helpdesk or other functions to a shared services centre can cut costs by up to 30% and streamline unwieldy national and trans-national business processes.

The alternative view is that shared services are a poisoned chalice that will destroy the independence, if not the jobs, of finance staff. Working in a shared services centre may mean moving to a new city or country and having to take orders from a giant consultancy you had no desire to work for.

Centralising corporate services in a single site or several regional centres is how many multinational organisations are responding to the increasingly competitive global marketplace. Shared services allow them to improve efficiency while simultaneously reducing headcounts and locating staff in low-cost countries such as Ireland, the Netherlands – and the UK.

Born, like most IT trends, in the US, shared services are likely to accelerate in Europe with the advent of the single currency.

In the words of Arthur Andersen corporate treasury consultant Charles Barlow, companies are asking themselves: ‘Why do I need 11 beancounters in each country to do my reports?’

SSCs have expanded on the back of business process outsourcing. The buzz phrase may be new, but the basic idea can be traced back to 1970s service bureaux, which allowed companies to ‘timeshare’ mainframe computers. The difference is that companies are now sharing their finance people.

As Barlow suggests, foreign currency exchanges and treasury operations are an obvious target for sharing services, but accounts payable and other finance, IT and human resource functions are just as amenable to the technique.

The most obvious benefit is to reduce the duplication of tasks between company departments, saving time and money. Another upside, for companies operating in different countries, is being able to relocate various services in countries with lower taxes.

The pinnacle of this movement is represented by outsourcing consultanciessuch as PricewaterhouseCoopers, Andersen Consul ting and the Deloitte & Touche subsidiary, CSL.

Third-party service providers such as these buy and implement new software on behalf of clients. This has the effect of reducing the clients’ IT investment risk and can transform hefty capital outlays into more balance-sheet friendly running costs.

Rather than coping with the shared services of just a single company, the major outsourcers often carry out business processes remotely for different clients within their own SSCs, generating even greater economies of scale from using both the same software and the same people.

SSCs and the Big Five

The shared services market is an important revenue source for the Big Five and IT companies like EDS. CSL, for example, has five centres across the UK, employing around 2,500 people. Its Newport centre deals with 25 government clients, including the Department for Education and Employment.

‘The greatest activity is in public authorities,’ says CSL director Dick Turpin. ‘Most public-sector finance departments have to do financial management in a similar way due to government rules, so it is easier to use a shared centre. They’re also good for boring administrative processes such as payroll and pensions.’

Turpin denies that SSCs spell job cuts for finance staff, however. ‘Deals frequently involve the transfer of staff to the shared centre. It’s unusual if they don’t,’ he says.

But even Turpin concedes shared services are not the ideal outsourcing solution for every company. As Richard Branson discovered a few years ago – when his outsourcing supplier, BA, began mysteriously approaching Virgin Atlantic customers – the idea of placing sensitive commercial data under one roof is an alarming one.

‘IT is a competitive advantage, so shared services between Marks & Spencer and British Home Stores, for example, would be more difficult to do,’ Turpin says.

Ernst & Young consultant David Powell argues that SSCs enhance, rather than sideline, the importance of accountants.

‘Although certain finance staff will lose their jobs, it’s positive for staff who transfer from a back-office position. If the outsourcer starts taking on other clients at the centre, finance staff dealing with them will get more front-office responsibility. Who wants to be in a support position?’ says Powell.

The UK is a preferred location for SSCs, he adds, because of relatively low staff costs. The most intense activity is in the manufacturing and oil industries – although the financial services industry is also growing fast.

A recent survey by the Economist Intelligence Unit, in conjunction with KPMG Management Consulting, throws further light on the shared services market.

The cross-industry study found a ‘great deal of confusion’ over what the US-derived term ‘shared services’ actually involves. In spite of the muddle, 27% of companies already used shared services, while 48% had implementations underway. A clear majority (58%) aimed to spread shared services across Europe.

Finance departments were in the frontline of change, with 54% reporting that the finance function was the most likely to be integrated into a shared service.

When asked to list the expected benefits of SSCs, nearly all respondents (98%) cited cost savings, followed by the standardisation of services across Europe. When asked to give the approximate cost savings provided by sharing services, one-third claimed it had saved their company between $1m and $3m (#0.6m to #1.8m).

IT and global telecommunications made the shared services concept possible. Another survey, from Ernst & Young and including many US respondents, showed that the big enterprise resource planning software houses had pretty well sewn up the market.

Oracle had just under a quarter share, closely followed by SAP (20%) and JD Edwards and PeopleSoft (both 16%). And 90% of the respondents based their activities either in a joint shared services site with IT or in the corporate data centre.

Even though IT is key to sharing information across wide area corporate networks, E&Y found little evidence of companies employing state-of-the-art technology. Only one respondent in the E&Y survey planned to exploit the World Wide Web as a carrier for financial applications.

Simon Scarrott, from management consultancy Compass – which specialises in benchmarking data centre productivity – warns that, in spite of the obvious benefits of centralising operations, there is a downside and a limit to the economies of scale that can be achieved.

‘Ernst & Young’s 30% savings estimate would be a conservative claim,’ says Scarrott. ‘Including savings on the cost of complexity, our measurements would put the figure close to 40%,’ he adds.

‘But it’s a double-edged sword; the main concern is to implement the new environment in a way that minimises disruption to service quality.

If you centralise, you can introduce a dissatisfied client base, simply because there has been a change. And every pound you save on maintenance, you can lose on productivity.’

The main challenge is assessing these intangible productivity costs, he explains. ‘If you come out and show that centralisation will save #5m, you have to interview stakeholders to see if they would be dissatisfied.

If the initiative will save you #5m, is that worth hacking off 150 people?

Those decisions are subjective – and very tough.’

The Compass consultant argues that most business functions have a hidden ceiling.

‘Once any organisation gets above 300 people, it begins to suffer dis-economies of scale because the departments become so specific in the activities they carry out that they begin to experience baton-passing.’

Scarrott suggests there is a financial processing equivalent to getting the same delivery person to load and drive the van rather than involving three or four departments. And by focusing activities into a single location, companies introduce a single point of failure, which makes them more vulnerable.

To ensure organisations do not experience these pitfalls when they centralise and rationalise functions, Scarrott advises they have ‘mature enough measurements in place to make sure that it makes the impact they’re expecting’.

Quibbles and caveats aside, E&Y consultant Powell predicts that shared services will expand into new areas such as supply-chain management. ‘Companies need more than just accounting shared services and financial consultants.

They may also need a new supply chain and HR support.’

The digital revolution, with its promise of electronic commerce and corporate intranets, will undoubtedly fuel further growth in the shared services concept.

According to Scarrot, using the Net as a platform for common services will become ‘the norm’ and where service staff and their users are located will be immaterial. The technology to do it all already exists and is being put into practice among pioneering organisations.

But, as more than one observer has noted, the people who step into the future first will bear most of the pain.

SHARED SERVICES – THREE STEPS TO SUCCESS

Ernst & Young executive consultant David Powell offers the following advice to FDs considering shared services deals.

Step 1 – The issue A client might have heard about outsourcing and joint ventures. At this stage they would need to consult around an agreed vision to build consensus among staff. Consultants would be expected to produce a preliminary cost savings draft to show them what savings they can expect.

Step 2 – The design phase It all depends on how quickly you want to implement shared services. The average timescale is coming down from 18 months. But if you’re doing it across lots of different countries, it is going to be very difficult. Going faster has drawbacks because if local managers have not bought into the process, they’ll knock it down at every opportunity.

Step 3 – Implementation Nearly 80% of shared services are set up around a service level agreement drawn up with the provider. As well as specifying delivery deadlines and quality thresholds, the document should also outline how a SSC will integrate with the existing system. It won’t be legally binding, however, unless a third party is involved.

FINANCE LEADS THE CHARGE

According to research carried out for Ernst & Young by Research International, setting up shared services is generally not done in isolation, but as part of wider change programmes that can include tax rationalisation, supply chain management initiatives and customer service improvements.

The finance function is often the proving ground for shared services centres, however. A combination of finance and financial management was found at 25% of the companies – the largest category. With treasury, purchasing and ordering functions included, the figure reached 40%.

E&Y’s figures confirm that some finance activities, notably accounts payable, are more amenable to the technique than others. As industry experience grows, however, other types are likely to follow.

Key findings: 79% of companies interviewed believed their SSC was successful. The main benefit cited was better service at lower cost.

*Cost savings achieved averaged 26%

*Headcounts reduced by 21%

*Respondents reported better management information and greater flexibility

*Companies planned to develop shared services further by broadening services offered and catering for more units, for example by taking the concept globally rather than regionally

CASE STUDY: BBC MOVES ACCOUNTS TO MEDAS

One of the UK’s highest profile shared services initiatives was set in train at the BBC in 1997 amid controversy over the pension and redundancy terms offered to 700 finance department staff who transfer to Media Accounting Services (MedAS) – a joint venture between the then Coopers & Lybrand and US IT company EDS.

The ten-year contract is thought to be worth #500m. So far, almost 500 staff have transferred to a dedicated shared services centre in BBC offices in Ealing. The new integrated accounting system is being brought together on Tetra C/S software and will then be migrated to R/3 applications from German software vendor SAP. The implementation is scheduled for completion by April 2000, at which point most of the remaining BBC finance staff will transfer. MedAS will then be free to seek new clients – with a proportion of the income going to the BBC.

The objective of the exercise, according to BBC director of finance John Smith, is to halve the costs of running four separate accounting systems.

‘Two years in, we’ve got an outsourced shared services centre which is starting to show the performance standards we anticipated. In a few months’ time, we’ll pilot the SAP package,’ says Smith.

Smith says there are many situations where shared services don’t make sense, but continues, ‘If you’re running a large organisation like the BBC where efficieny is high up the agenda, there is no reason why you can’t apply the same principles to the back office that you do in the front office.

‘We’ve chosen to find a partner, MedAS, which combines the accounting and consulting skills of C&L with the IT delivery of EDS, so we’re getting the best of both worlds.’

At the time the contract was signed, Smith vowed there would be no redundancies and savings would be ploughed back into programme-making.

A number of treasury, group financial control, strategy and planning and internal audit staff will remain at the BBC.