VideoIf you want to know why shared service centers (SSCs) keep CFOs awake at night, Ric Piper could probably tell you. Until last October, Piper was group finance director of WS Atkins, an £806 million ($1.328 billion) U.K. engineering consultancy whose SSC in a small town in the west of England was the cause of much grief — not just for the company, but also for Piper.
Despite his plans to take up a CFO post at another company, Piper had agreed in spring to stay on at WS Atkins to finalize the installation of the SSC's companywide billing and accounting system. Piper's aim was to use the new system to streamline and centralize all the invoicing for the firm's 12 divisions in 175 offices worldwide. But the rollout didn't go according to plan, and some £20m of invoices failed to go out the door to customers.
As the investor community was soon to learn, the impact was brutal. At their half-year results meeting in early October, executives at WS Atkins glumly announced that net debt had climbed to £120m as of September 30 from £57m at its fiscal year-end in March. Pre-tax profit was down by one-third, to £21m. The executive team, revealing that they took a £6m exceptional charge for the installation of the new billing system, placed the blame squarely on the SSC's woes, tersely stating in a press release: "The introduction of the technology refresh and new control systems has been more difficult and costly than expected, which has had an adverse impact on billing and credit control." The firm's share price immediately took a hit, tumbling over 70 percent in one day of trading. As for Piper, he lost out on the CFO job that he had lined up at Trinity Mirror, a U.K. publishing group, after Atkins' fateful half-year announcement.
The only good bit of news in this cautionary tale is that by December, Michael Jeffries, the firm's chairman and chief executive, was able to report that the system was "90 percent OK," though "still not performing entirely satisfactorily." But the episode is just further evidence of the pitfalls and perils that CFOs run into when running SSCs.
And it's not just technological meltdowns that can cripple SSC projects aimed at centralizing routine transactional processes into one location. "Often two or three years into a project, SSCs start to come unstuck," says Michael Gibson of Gunn Partners, a consulting firm. Among the reasons why, he lists poor project management, internal resistance — particularly from local finance managers unwilling to relinquish control of the processes they've been accustomed to overseeing — and lack of IT and process standardization.
Pain and Gain
Despite the risks, however, there's no shortage of finance chiefs in Europe who want to imitate pioneers such as Ford and Intel, which have been reaping big rewards since setting up cross-border SSCs in the 1980s. A big driver has been — and will most likely continue to be — cost reduction. According to a new survey of 80 companies in Europe from The Hackett Group, a benchmarking company, cutting administrative expenses is the main motivation cited for having an SSC. With good reason. Hackett's research found that best-in-class SSCs can slash 56 percent of a company's accounts payable costs, 44 percent of accounts receivable costs, and 53 percent of staff expenses. Beyond that, firms also cite the promise of improved service levels and the economies of scale achieved by grouping similar tasks and expertise in one place.
What's more, in today's post-Enron era, CFOs are pointing to another benefit of SSCs: greater transparency. Finance chiefs say they are relying on SSCs more and more to provide the fast, accurate performance data that their stakeholders now demand. "It's about survival, certainty and visibility," says William Plant, vice president of finance and administration of EMEA for Oracle, the $9.7 billion enterprise software firm.
Having overseen a project to set up an SSC in Dublin for its back offices in Europe, the Middle East, and Africa (EMEA) in 1999, Plant says the events of 2002 underscored the importance of SSCs that can provide centralized, standardized data. "What we didn't realize when we set up the shared service center a few years ago was how much it would help us in terms of corporate governance," he says.
But six weeks before Oracle's year-end last April, it suddenly became crystal clear. The company had to switch from its former accountants, Arthur Andersen, to Ernst & Young, "so we pulled together financial controllers from our three SSCs [in Dublin, Sydney, and Rocklin, California] and we went through a four-day workshop with our new auditors," Plant recounts. "As a global company, it would have been tough if we didn't have the information we needed already waiting for us in the SSCs." That ability to transfer knowledge will also benefit internal governance in the future, he says. "If internal audit wants to check something, they only need to go to three places."
Nonstop
More than ever, finance managers have a lot riding on an SSC's success. But as many will attest, there's clearly much to learn. Peter Moller, shared services team leader for Europe and Africa at Deloitte & Touche, says that getting an SSC to run smoothly is a job that never ends. "Think of running an SSC like one of those acts in a vaudeville show that have plates spinning round and round on poles," he says. "You have to work really hard to get all the plates spinning at the same time, and to keep them all spinning, you can't stop for a minute."
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