A/P Shared Service Centres: Gaining Competitive Advantage

‘Do more with less’ is the mantra for accounts payable (A/P) shared service centres (SSCs), which are predominantly set up to reduce operational cost through more efficient, standardised and automated operational processes. Organisations also find regulatory reporting becomes less complex and time consuming due to an A/P SSC. Today, some A/P SSCs are planning to move from their current state of supporting back-office, non-core transactional activities to value-added activities for the firm.

However, when examining two clients’ A/P SSCs, it became clear that the shared service strategy was not very well integrated with the rest of the business strategy. This prompted an examination of the overall SSC strategy to see whether it could be extended to provide a competitive advantage to the business.

End-to-end View: From Treasury to Procurement

Working capital is the flow of funds necessary for the working of an organisation. While working capital management (WCM) is important for an organisation, and A/P is an important component for managing working capital, a wider view of end-to-end supply chain is even more important for the long-term viability of any business, particularly in the current economic environment.

Currently, there is lack of an end-to-end view and ownership for managing the operating margins, working capital requirement and supply chain cycle efficiency between the A/P SSC, procurement and treasury functions. The goals of these three functions are often not aligned, resulting in conflicting objectives.

Organisations need to take a more holistic view of WCM and supply chain management (SCM), and integrate internal functions with external suppliers to create a supplier-organisation-customer network to deliver value to their shareholders. Multiple stakeholders within an organisation – treasury, finance, business functions, procurement, and SSC director – need to work together with their suppliers to build this holistic picture.

Also, it is important for firms to ensure the performance measurement criteria for various functions are consistent with, and complimentary to, each other. For example, if the sales team is solely measured on their sales target and the A/P shared services team are measured for efficiency, while treasurers are measured on the basis of optimisation/investment of cash flows and working capital, then the firm as a whole would never be able to achieve sustainable competitive advantage. A balanced scorecard approach would help to combine the financial performance of a firm with internal key performance indicators for A/P SSCs.

Case Studies: Shipping and Pharmaceuticals

The research made comparisons between a shipping company and a pharmaceutical company, both of which had been operating an A/P SSC for five to six years and considered their A/P SSC as mature. The annual financial statements for the past four years showed that some of their cost indicators have come down, specifically cost of goods sold (COGS), general administrative (G/A) expenses, and net interest expense (NIE), but it was still difficult to relate it back to a SSC strategy. Organisations should be tracking the SSC strategy against the operating margin.

Case Studies

Shipping company

This company is a conglomerate group with container/shipping line as the main business, operating in 150-200 countries.

The company moved to a SSC because it:

  • Provides a lower cost platform to reduce overall operating costs. This was required to compete with firms from emerging economies.
  • Drives much higher efficiencies in the company by pooling resources and processes.
  • Improves the quality of the work.
  • Increases productivity and timeliness of activities.
  • Facilitates the change of IT platforms, as it is easier to implement a change in one location.
  • Drives improvement of processes across the organisation.

One of the acquired entities in early 2000 already had a SSC, which helped in adopting the model for the rest of the company at that point in time. The finance organisation opted for Asia as its base for shared services. Six centres are supported out of the three countries. These locations provide limited backups for each other depending on the type of activities supported from these locations. For example, A/P processes are not high priority, time-bound processes, and any disruption to A/P activities can still be managed from the same location a day or two later.

A bottom-up approach was used for identifying relevant processes from specific business units to put them into a SSC. The success of doing that for the first few units paved the way for continuing the effort of putting more processes into SSC. This approach could be described as ‘lift-shift-standardise’. The processes were lifted from decentralised locations, put into SSC and then standardised and automated through process reengineering and enterprise resource planning (ERP)/SAP roll out. A global SAP rollout is currently in progress. SAP has acted as the enabler for streamlining and standardising processes. The rollout is expected to be completed in a three to four year timeframe (by 2013).

Pharmaceutical company

This company has a history of organic growth, as well as through merger and acquisition (M&A) activity. Going forward, this company plans to do more of the drug development related activities, in a partnership role to predominantly focus on marketing and selling drugs. It operates across various locations in Europe and North America.

The company identified areas where shared services should excel:

  • Processes standardisation.
  • Implementation of effective controls and governance.
  • Delivery of a fit for purpose and cost effective service.

A/P SSC model was considered in UK when this company decided to expand its business in Ireland. Instead of setting up a new finance function, it decided to use the existing set up in UK for supporting the A/P activities for Ireland too.

The A/P SSC has been in place for five to six years and is seen as mature. As per the existing business model and the pricing structure, it is possible to have substantial growth in a new country/market without the requirement for setting up significant back office infrastructure and incurring massive expenses/expenditures for supporting new business.

Looking at some of the financial figures in terms of how the two companies measure the SSC’s success, no empirical evidence was found that connected the success/advantages of A/P SSCs to either the income statement or balance sheet, or the cash flow statement.

In addition, the research found that in both cases the A/P SSC, procurement and treasury objectives were in conflict with each other. For example, operation efficiency is a significant metric for a SSC, so it will try to reduce the operational cost and improve efficiency for payment processes by turning invoices around as quickly as possible. Therefore, some A/P SSCs are actually expediting payments – as soon as it receives the invoice, it processes the payment and pays the supplier, usually before term. However, if the organisation had a 30-day term on the payment, then the SSC should not pay out for 30 days; therefore, a fast turnaround means that the company is actually losing cash from its books. Strategically it may be that the business needs to sacrifice some efficiency in order to have a more balanced working capital and supply chain cycle.

On the other side of the organisation, the procurement side will want to make bulk purchases in order to receive a discount. Again, this means that money is lost from the books because this requires a large sum of money upfront. So even though the discount is good for the organisation in the short-term, it works against the treasury’s direct objectives of keeping cash on the books because of the credit crisis.

These three divisions do not communicate to each other in terms of a coherent strategy for working capital or operational expenses, despite the fact that, at a general level, they report into the chief financial officer (CFO). Ideally, they should be talking to each other, but the reality is that they don’t. In one of the case studies, it was clear that this was due to the organisational structure, because the A/P SSC was managed out of a different organisational vertical. The organisation structure can be a considerable hindrance in terms of an integrated strategy.

Gaining Competitive Advantage Through A/P SSCs

Figure 1: Current Status of A/P SSC Actors and Factors – Drivers/Enabler

Source: Das, Arunav. “Competitive Advantage Provided by Accounts Payable Shared Service Centres”, March 2010

Figure 1 shows the current state of affairs where the A/P SSC, treasury, and procurement department are not linked with each other in terms of business strategy. The drivers that underpin the strategy as a whole are such things as M&As, inflation, globalisation, economic downturn, etc. Within the three circles are the different objectives of these three functions, such as consolidation, standardisation, automation and re-engineering for A/P SSCs.

The procurement function is based on the business units and suppliers/vendors, which are common touch points for the A/P SSC and purchasing department. The treasury does not directly interact with the business units or suppliers.

Based on the current status, here are 10 options to increase the benefits for companies already operating A/P SSCs:

1. Firms can choose to continue with the existing evolution of A/P SSCs by standardising and automating end-to-end purchase-to-pay (P2P) cycle. There is limited competitive advantage of following this strategy as competitors can easily imitate the A/P SSC model and standardise/automate their processes.

2. Firms can choose to create an integrated framework consisting of internal A/P, procurement and treasury functions and external suppliers’ network, to align the operating margin, WCM and SCM strategies of a firm (see Figure 2). The benefits of higher operating margins, lower NIE and integrated supply chain networks would be reflected on the return on capital employed (ROCE) for the firm. It is similar to the current state diagram (FIgure 1), but brings those three functions closer together through common shared objectives: operating margins, NIE, WCM and ROCE. This is the main recommendation from the research.

Figure 2: Integrated Framework for A/P SSCs

Source: Das, Arunav. “Competitive Advantage Provided by Accounts Payable Shared Service Centres”, March 2010

3. Firms can choose to use the existing skill-set, capabilities and core competency of A/P SSC staff for driving M&A growth and integrating newly acquired business to the existing business model. Quite often M&A’s fail to deliver the deal value due to implementation and integration issues. Using the A/P SSC skill-set and existing processes for post-merger operational integration would lead to the financial success of a firm.

4. Firms can choose to up-skill its existing A/P SSC staff to provide more augmented services. Fundamentally, continue with the existing model, but provide additional values in terms of helping out with statutory and regulatory reporting, risk management, vendor selection and identification of lowest bidder, and consistent management information and reporting.

5. Firms can choose to implement just one element of the framework and track the performance of the A/P SSC through COGS, G/A, cost of credit and NIE, instead of implementing the complete integrated framework [option 2].

6. Firms can choose to operate SSCs as business centres rather than cost centres. A/P SSCs should implement a sophisticated pricing model based on transactions volume/usage and price their services back to the business functions. This would help A/P SSCs to track their value add to the business and also help them to identify key business functions where there is more opportunity to reduce the transaction costs though continuous process improvement initiatives.

7. Firms can choose to integrate A/P SSC goals and objectives with only the WCM or SCM strategy, instead of implementing the fully integrated model [option 2]. Integration with WCM would imply the A/P SSC needs to work closely with the treasury function, while integration with the SCM strategy would imply the A/P SSC would need to work closely with procurement and business functions.

8. Firms can choose to introduce the concept of a service marketing mix for designing, promoting, pricing and distributing the A/P SSC’s services. Companies normally do very well in terms of a marketing strategy for customers, but they don’t do it so well for SSCs and internal customers. This approach would help to generate awareness about the A/P SSC’s capabilities to support business function and will also help to gather the business function’s service requirements from the A/P SSC.

9. Firms can choose to use the A/P SSC as a knowledge management centre for P2P cycle. There is an enormous amount of knowledge available in A/P SSCs, such as customer and vendor information, and also ERP applications for the P2P processes. This information could be used for advanced data analytics to evaluate opportunities for vendor rationalisation, total spend per business function/product per annum, and driving vendor/supplier negotiations.

10. Firms can choose to move to low cost locations every three to four years to continuously keep their costs down, as the cost benefits provided by some of the initial SSC locations (e.g. Dublin or Warsaw) have eroded over a period of time and new locations have emerged (e.g. Philippines and Budapest). The decision, however, would need to be evaluated for costs saved, cost of co-ordination and cost of migration. The decision to move should be taken only if the benefits outweigh the migration cost.

Conclusion

Figure 3: Balanced Scorecard for Integrated Framework: Adapted from Kaplan and Norton, 1996

Source: Das, Arunav. “Competitive Advantage Provided by Accounts Payable Shared Service Centres”, March 2010

The adapted version of Kaplan and Norton’s scorecard (Figure 3) is an integrated strategy that is based on financial measure, operational efficiency, WCM and SCM. These are the four different parts that needs to be integrated in an A/P SSC strategy.

Firms should move away from the traditional silo based A/P SSC/procurement/treasurer functional strategies to over-arching multifunctional strategy based on the holistic WCM and SCM requirements of the firm. Implementing option 2 would be a step in this direction, but it would most likely require a change in the mindset of an organisation.

To read more from Citi, please visit their gtnews microsite.

38 views

Related reading