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Finance departments are continuing to move functions to offshore shared-services groups but are stopping short of full globalization.
Sarah Johnson, CFO.com | US
October 27, 2009
Large companies are getting more comfortable with using shared-services centers and are considering whether to move more finance transactions into the organizations, which can be run in-house or by a service provider.
According to the consultancy The Hackett Group, a longtime proponent of the shared-services model, 93% of the largest 1,000 companies by revenue worldwide are using SSCs for at least some functions. And more than three-fourths of 200 companies surveyed by Hackett use them to handle some of the more mundane finance processes, such as accounts payable, accounting for fixed assets, and processing travel and expenses.
To be sure, a lot of back-office work is still kept close to headquarters. Only 25% of the survey participants allow SSCs to handle order entry, for example. A company's confidence in allowing transactions to be processed by a captive SSC located offshore or by an outsourcing vendor depends on whether any particular department — a sales team, for instance — is willing to give up some control, explains Bill Foley, managing director of finance transformation at Hackett.
"It depends on the culture and whether the shared-services organization can prove it can effectively handle that kind of work and take the burden off of sales, while improving the level of quality to the end customer so that the relationship is not harmed," he tells CFO.com.
Nearly two decades after a handful of companies began consolidating some finance and IT functions in offshore SSCs, there's renewed interest in expanding their use to take advantage of cost savings derived from labor arbitrage and tax incentives, according to outsourcing advisers. Popular spots include India, the Philippines, Costa Rica, Argentina, Poland, Romania, and China.
PricewaterhouseCoopers senior managing director Charlie Aird says he's receiving three to four calls a day inquiring about expanding or establishing a shared-service model, whereas only six months ago he estimates he was averaging just one such call a week.
"In many instances people are saying they've got to drive down costs, the back office is costing too much," Aird says. "Nine months ago, they couldn't afford [to set up an SSC]. They had to cut back on discretionary spending. Now it appears they're more likely to spend a little to gain larger savings."
Aird is also seeing some companies that have been outsourcing for a decade or more send internal-audit work and even some financial analysis offshore.
In addition to trimming G&A costs — by as much as 20%, according to Hackett — consolidating functions to one location and one provider can yield the benefit of "one throat to choke" when something goes wrong or an expected cost reduction isn't realized, says Foley. Although cost is the major driver for setting up an SSC, 89% of companies Hackett characterizes as "world-class" also do it to improve service, quality, and timeliness, the consulting firm said.
Indeed, outsourcing functions to an SSC canfree up employees to focus on more strategic matters, experts say. Aird is seeing companies with just $2 million to $8 million in revenue express interest, while larger companies are thinking about how to connect their outsourcing strategies with their overall business strategies. For example, a U.S.-based retailer he declines to name is working on setting up a shared-services center in Asia, in large part to begin exposing its brand to a new population as it prepares to eventually take up a larger presence there.
Still, despite claims of benefits from SSCs, there are limits on how much work CFOs are willing to let go. In a recent report based on discussions with 51 finance executives, Deloitte suggested that CFOs are holding back on globalizing finance even though most of them claim they want to do it. "The transformation to a global operating model for finance is still in its infancy — and it lacks momentum," the business advisory firm concluded.
CFOs told Deloitte they worry about service quality, missed budgets, risk, and employee morale. Indeed, those hurdles will continue to hinder the establishment of new SSCs, says Joe Cottone, a managing director and principal at investment management firm Tenex Capital Management. "Shared services is not a new concept, but whatever scared people about it the first time they considered it hasn't changed," he says. These days, companies that are looking at SSCs for the first time are most often influenced by outside consultants, the need for a serious turnaround, or a recent acquisition, he adds.
Further holding companies back from acting aggressively to set up an offshore SSC is the fact that talent may actually be relatively cheap here, at least while unemployment is still high, Cottone notes.