As shared service centres (SSCs) mature, the role they are performing for treasury is evolving. This continual development comes against the backdrop of an uncertain macro-economic environment, a shifting regulatory landscape, the increased importance of risk management and a growing strategic role for treasury within the business.
At the heart of this change within SSCs is the need for information to facilitate informed decision-making. Using technology as an enabler, corporations and their treasuries are seeking a broader range of information in greater detail and much faster than ever. With the correct vision in place and help from technology and banking partners, corporates increasingly have an opportunity to leverage the benefits of SSCs in ways they could not before.
SSCs: A Brief History
SSCs were initially formed to help companies centralise core competencies and reengineer processes to improve cost efficiency and financial and risk management. The centralisation of processes into SSCs that have had an impact on treasury operations has often been led by payments processes. The landscape of in-scope processes for centralisation has now widened to what were previously regarded as core treasury functions. Although frequently geographically distinct from central treasury, often being located in low-cost locations in central and eastern Europe (CEE), the technology underpinning SSCs has allowed specific parts of end-to-end processes to take place across geographically-dispersed locations.
While cost reduction and efficiency improvements remain a central goal of SSCs, other objectives have become important as their operational capability improves and additional functions are included, such as foreign exchange (FX) and liquidity management. For example, SSCs now play a major role in providing process expertise to work across the enterprise, linking with business units to improve working capital efficiency. Since 2008 increasing risk management capability has also been a critical goal of SSCs.
As SSCs mature and gain competence the scope and depth of the provision of services to the business, including treasury, has increased. This has impacted the organisational role and structure of both the SSC and the business units they provide services to. For example, treasury has become less concerned with daily transaction process execution and more focussed on process management, strategic alignment, and policy and control.
The emergence of the SSC has meant operating models have needed redesigning. This has been shaped by drivers specific to business models and industries, including technology capability, geographical footprint and, most importantly, customers. For example, the SSC adds another business entity in process execution and requires new management mechanisms, such as service level agreements (SLAs) and key performance indicators (KPIs), plus dashboards to ensure alignment and operational effectiveness.
Information is the Future
The financial crisis has put treasury on the frontline of business continuity regardless of macroeconomic or financial market volatility. As a result, treasury has taken a broader strategic role within the company seeking to further support and add value to the business directly. To fulfil these strategic objectives it is essential for treasury to engage with SSCs for effective process execution and, critically, for information. Treasury needs information to manage processes, drive decision-making and manage risk across the company. As SSCs have evolved to include multiple functions, treasury now has access to vast amounts of company information in a single location; making it easier to access and use. Just as importantly, this information can be used to manage the SSCs success in achieving the wider company’s objectives.
Where cost efficiency in the SSC was once largely about reducing headcount and streamlining processes, treasury is now better-placed to drive a cost-efficiency lever with greater financial return – namely, operating working capital. To optimise working capital, treasury needs to work across the enterprise gaining insight into the key users of working capital.
Trapped cash is not just sitting in bank accounts in geographies but all along the working capital cycle. The SSC is where these different silos touch each other. As a result KPIs, such as flow processing metrics for straight-through processing (STP) and working capital (WC) metrics for days sales outstanding (DSO) and days payables outstanding (DPO), can be set up for internal business units to work to.
An Ever-broadening Remit
The realisation by treasury of the potential benefits that can be derived from information within SSCs has accelerated the incorporation of additional services. Once the benefits of centralisation are reaped in a measurable way and demonstrated to the board, the expansion of services in the SSC becomes a self-perpetuating process.
The incorporation of additional functions in SSCs – and the ability to use the information generated effectively – has been enabled by improvements in technology and the emergence of process excellence as a profession. When SSCs were first introduced, enterprise resource planning (ERP) systems were all about delivering process execution and control. As ERP systems have advanced, there have been major improvements to data integrity and mechanisms to access and deliver data in the form of information to the business and treasury. Investment in system consolidation and integration, often utilising a common ERP system to drive core processes, makes it possible for treasury to have visibility and access to the core factors, processes and decisions that drive working capital and risk management globally.
There is a growing realisation by corporations that their banks are an integral part of companies’ end-to-end processes, as an additional source of expertise and information that can improve the quality of strategic decision-making and effective process execution. For example, bank information can help track the relative performance of suppliers. Similarly, it can help companies to improve credit control and inventory management and enable clients to service their own supply chain stakeholders. Bank information may also facilitate greater interrogation of customer behaviour for improved marketing.
Banks must work with their clients to package information for treasury and SSCs so that it can be used effectively. What is needed is actionable information, not just raw data. Smart banks are using their data flows and analytical capabilities to add value to their client relationships as many other aspects of the relationship, such as transaction execution and risk management, become increasingly commoditised.
SEPA Boosting Receivables Centralisation
While the uncertain economic environment is a key driver in expanding the remit of SSCs for more effective information management, technology is no longer the only key factor. Increased regulation and changing market structures are driving significant change.
The introduction of the single euro payments area (SEPA) with its 1 February 2014 end date is prompting companies to add centralised receivables to SSCs. Historically, collections have been difficult to rationalise because of the use of different payment instruments and reconciliation methods in different countries.
SEPA does away with many of those requirements. Payments and collections instruments are the same throughout 27 EU countries, three European Economic Area (EEA) member countries and both Switzerland and Monaco. Moreover, there is standardisation of clearing procedures and cut-off times through the SEPA area.
At a basic level, SEPA requires compliance. It becomes mandatory as of 1 February 2014 and companies must ensure they can make payments and collections so that business can continue to function. However, companies are also using the opportunity presented by SEPA to audit where they make collections and which parts of the business are involved. By doing so SEPA can be used as a catalyst to drive change across the business, as well as an opportunity to improve collections efficiency.
SEPA also offers the promise of improved reconciliation and account rationalisation – long a priority for many treasuries – through clearer guidelines on how information is presented in specific fields. Similarly, for those companies with appropriate organisational structures, SEPA enhances the benefits of payments on behalf of (POBO) and receivables on behalf of (ROBO) structures because it removes the need for many local bank accounts.
Additional information, in the form of KPIs, may be required to deliver improved reconciliation while extra data is also needed for POBO and ROBO structures to route payments and to enable beneficiaries, for example, to reconcile payments. However, the opportunities created by SEPA are expected to spur further standardisation, which in turn will improve transparency, risk management and efficiency.
Operational Evolution is not Linear
While many corporations are seeking to add functions to their centralised SSCs, other companies are designing and implementing operating models that incorporate alternative structures. For example, centralised centres that perform single – or a selected few – processes. Such centres concentrate expertise for a specific function, such as foreign exchange (FX) or commodities, into a single location and standard process.
By creating end-to-end visibility and ownership of process, companies can achieve huge benefits. In FX, for example, a global process centre can improve pricing, facilitate netting and enhance the effectiveness of hedging in a conducive location. As these centres gain increased competence and knowledge, this can be utilised to create competitive advantage or additional value-added activities can be assumed, which can directly influence business results.
There is no single operating model solution. Global process centres are not suitable for all companies and many of the same benefits can be gained using a multi-regional SSC structure. However, it is essential that multiple SSCs serving a company and treasury use globally consistent processes enabled by common integrated systems and trained competent professionals.
Whatever structure companies choose, they can only achieve their goals if they work with a bank that has appropriate capabilities and expertise. While many of the benefits of SSCs are delivered by effective use of scale and technology, human relationships with banks, as well as suppliers and customers, are critical in transitioning to new transformational structures. Corporations need to be confident that their bank is there to support treasury in the provision of useful information, as well as with products and services, as it broadens its role across the business and continues the task of re-wiring SSCs to meet the challenges of the future.
Treasuries should be centralised but also extend "strategic autonomy" to decentralised units because they need to be responsive and close to the customer, argues Richard Scase, author and business forecaster on global megatrends.
The benefits of an in-house bank are increasingly evident, but some treasury departments still hesitate to take the plunge. This article offers a step-by-step guide.
As the squeeze on banks intensifies, virtual accounts are a win-win by offering efficiencies and meeting the needs of their corporate clients.
Why corporates should consider the multi-currency virtual account (MCVA) - a bank-offered cash product which allows them to maintain foreign currency balances and affect cross-boarder transactions where a physical account doesn’t exist in the local currencies.