The importance of shared service centres (SSCs) in delivering value to organisations is increasing and their prevalence as a means of achieving efficiency and cost reduction in the market is growing.
For large global or regional organisations, leveraging SSCs to centralise and optimise financial activities such as payments processing is a well-established means of enhancing efficiency, control and transparency and reducing costs. Once initial cost savings and efficiency improvements have been made, the challenge for finance and SSC managers is how to continue driving value and contributing to the operational and strategic objectives of the company. Recent surveys reveal that around one third of mature SSCs have been able to deliver 10% year-on-year savings over a sustained long term basis. As a result, SSCs need to adapt and evolve in order to continue delivering meaningful value back to their organisations. These SSCs are actively seeking opportunities to expand the remit of their current services, service new processes and geographies.
Meanwhile, the benefits of centralised and standardised operations are increasingly being sought by mid-market organisations which, similar to their larger counterparts, are seeking cost reductions and efficiencies during the current period of on-going economic uncertainty and changing regulation, where cost, efficiency and risk management continue to be priorities.
The Appropriate Approach
Organisations of all sizes and business segments are familiar with the principles of centralisation, standardisation and automation to achieve efficiency within their financial processes. While enhancing efficiency is an obvious objective, this must also be commensurate to the business requirement. For example, while a company may seek to achieve optimal levels of efficiency, the level of investment required may be disproportionate to the value that it gains by doing so.
Consequently, each company’s approach to centralisation, and the degree of standardisation and automation that they achieve, may be different. Citi supports over 1,000 SSCs globally, providing the group with insight into a wide diversity of approaches to centralisation, the sharing of pragmatic ideas and best practices derived from working with many of the world’s most respected organisations. However, regardless of a company’s centralisation objectives and the path that it follows to achieve them, a universal issue is that there is always more to do and increasingly ‘do more with less’.
Expansion of Scope and Objectives
By demonstrating on-going value, SSCs are becoming more prominent within the organisation. Through regular reporting of key performance indicators (KPIs) and delivering economies of scale, they are proving their worth. Gaining the internal credibility and justification to expand, SSCs are in a better position to become multi-functional and multi-geographical.
- Expansion of scope of activities: While accounts payable and liquidity management were often amongst the first activities to be centralised through a financial SSC, the benefits of centralisation are now being recognised in functions such as travel and entertainment (T&E) and expenses management, trade finance and human resources.
- Manage processes for new geographies: Those that have not yet been centralised and/or support growth in line with the company’s expansion plans, whether through organic growth or mergers and acquisitions (M&A). For example, many organisations are expanding the reach of their SSC into regions such as Africa and the Middle East.
- Seeking further efficiencies and manage end-end process rather than only transactional elements: For example, beyond payment processing to activities across the procure-to-pay cycle.
Figure 1: New SSC Value.
As SSCs become mature, the activities they manage become more strategic and knowledge-centric in nature. The trajectory for a SSC can take the path of firstly reducing operational complexity and cost, moving to a state of optimisation and operational excellence and onwards towards delivering strategic business impact. Direct cost reduction and improved controls have shown significant positive impact in the SSC journey and will continue to do; however mature SSCs are working increasingly closely to the organisational business units, becoming client-centric and having greater focus on improving service quality. For an SSC to reach this point many factors will have an influence, including organisational alignment and support, appropriate governance structures, SSC tenure and experience and talent retention, in addition to technology and process alignment.
As the SSC evolves, its place within the organisation can shift. SSCs have evolved from low-cost, high-volume processing hubs to centres of excellence or managed service providers. As a result of their wider role, reporting lines are also changing. While a financial SSC may have reported to the treasurer or chief financial officer (CFO) in the past, increasingly they are shifting to the chief information officer (CIO) or chief operating officer’s (COO) sphere of responsibility. These individuals may have different objectives to those of the CFO or treasurer, which is further fuelling an expansion in responsibility such as procurement. Not only does centralisation of procurement enable greater purchasing power and economies of scale, but there are considerable advantages in building synergies between procurement and finance. For example, risk can be managed more effectively using trade finance instruments, and there are working capital and supply chain benefits by using techniques such as supply chain financing (SCF).
Figure 2: Factors to Drive Increased SSC Impact.
Enablers and Challenges
Across the SSC agenda, technology is playing an increasingly important role in driving additional value for organisations. The global nature and capabilities of extensible mark-up language (XML), procurement systems, employee self-service portals and finance systems are helping to unlock centralisation opportunities. For example, electronic bank account management (eBAM) automates bank account maintenance, including the exchange of messages for opening, closing or changing signatories on accounts with banking partners. XML-based ISO 20022 standards, on which single euro payments area (SEPA) payment messages are based, enable formats for payments and account information to be standardised across banks, regions and currencies. Standardisation is key to increasing automation, whether accounts payable (A/P) or receivable (A/R), human resources or employee services, finance or accounting. In many cases leading SSCs have a specific function, dedicated to process optimisation to continue streamlining processes and deliver cost reductions.
There are undoubtedly new challenges that SSCs need to consider as their scale and remit increase. It is essential to remain connected to internal customers in order to ensure that the SSC’s services continue to meet the changing needs of the business. This was often easier in the past, when the SSC and business units’ finance functions shared the same reporting lines. SSCs therefore need to be focused on establishing an on-going dialogue with local finance managers to understand their business requirements and to provide regular reporting of service levels and key performance indicators. Furthermore, SSCs can leverage their central view of data to bring new customer and supplier intelligence to the business, in order to drive improved customer service and better-informed negotiation. Similarly, by improving processes such as automated reconciliation, cash application can be accelerated, improving days sales outstanding (DSO) and releasing customer credit lines more quickly, therefore contributing directly to business units’ sales objectives.
As SSCs continue to grow in their number, size and importance, the demand to attract and retain experienced and qualified staff increases. This is an on-going concern for SSC management, particularly in regions with a high SSC concentration such as Central Europe. In order to meet this challenge, organisations are placing greater importance on making their SSC an attractive working environment for potential employees and with attention being paid to staff development in order to foster retention.
Support from Strategic Banking Partners
SSCs’ change in scope and responsibility also results in new demands from their banking partners. Firstly, although pursuing regional or global centralisation objectives is not new, SSCs are able to achieve higher targets through enhanced technology and greater support internally for centralised processes. Consequently, they need banking partners that fulfil a range of criteria, including:
- Geographic reach and in-country support to manage their local, regional and global cash management needs.
- Expertise to understand their centralisation objectives and ability to advise on best practices.
- Pragmatic, integrated solutions that span business processes such as supplier management, A/P and procurement.
- Access to clearing systems worldwide to facilitate new payment and collection methods. For example, while local sales teams may have received payments and chased up late collections in the past, a centralised approach to collections may require customers to provide additional remittance details in order to facilitate automated reconciliation, which also creates new banking demands.
Currently, the migration to SEPA continues to dominate many SSCs’ agenda. SEPA has forced organisations to examine their accounts payable and receivables processes to understand the impact of SEPA and their migration strategies.
Many of Citi’s customers were among the early adopters of SEPA payment and collection instruments, but there is still progress to be made before organisations become fully SEPA compliant. In addition, those that have already migrated are now seeking our support in leveraging the benefits of a standardised payments environment in the eurozone. SEPA is also proving a catalyst for organisations to centralise business activities such as payroll, while also evaluating changes to A/R within Europe. This naturally has, and will continue to have, an impact on SSCs. Beyond SEPA, the current trend to centralise procurement and HR activities will continue in order to gain scale and standardisation of working capital benefits.
Overall SSCs will play an increasingly important role within their organisations. We will likely see a transition from processing hubs to global business service divisions as more functions and geographies are incorporated, centres of excellence are created and SSCs become both knowledge and transactional centres.
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