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Globalization and new technologies are driving a new enthusiasm for an old idea and an even older goal: eliminate duplication, enforce standardization, and cut costs. And CFOs lead the charge.
David Rosenbaum, CFO.com | US
October 13, 2011
In 2010, Mike Holmes was lured out of retirement by his last employer. His charge was to run the company's shared-services center in Malaysia until he could find someone who could take his place, train that person, and then return to his happy retirement.
Why did the company reach out to its former finance director, then two years retired?
Because he had done it before. By the mid-2000s, Holmes had helped move 95% of his company's SG&A functions to Kuala Lumpur. And because he had done it before, Holmes knew how hard it was. "Moving factories and administrative stuff offshore is hard," he says. "Getting different countries where you operate to allow you to put things in a shared-services center is hard. In Germany, for example, they're not comfortable with their books and records and tax returns being done outside the country. They're afraid they're going to get cheated."
On the other hand, Holmes points out, cost-reduction benefits and efficiencies can be massive if "you have good procedures, processes, and an IT platform everyone can work on."
Easier in the Cloud
Decades ago, when the concept of shared services (taking first back-office operations such as payroll, IT, and human resources, and then other functions such as procurement and logistics out of individual business units and centralizing them) was pioneered by companies such as Proctor & Gamble and Bristol-Myers Squibb, integrating on a common IT platform was a huge challenge. For many companies, it still is. PricewaterhouseCoopers senior managing director Charles Aird says he sees companies that have grown through mergers and acquisitions and have "never truly integrated them." Consequently, says Aird, "on a day-to-day basis you've got different customer masters; different charts of accounts. You may have 15 different instances of your SAP ERP, all implemented differently."
For that reason, although shared services began with large multinational companies seeking economies of scale and process efficiencies, today it may be smaller companies (taking advantage of such platform- and infrastructure-as-a-service cloud providers as Rackspace, Amazon, IBM, and Microsoft Azure) that can more easily achieve that common IT platform so necessary to creating an efficient shared-services center.
"The cloud model," says Accenture global managing director Paul Boulanger, "is the evolution of IT. It's just like the evolution of the utility business in the 1890s. Back then, every business, every manufacturer had its own generators. People started thinking, we don't want to manage our own electrical-generation ability. The cloud says every company doesn't need to own its own infrastructure or applications. The cloud is a shared service. Does it make sense to have every business unit in the enterprise manage its own applications? No."
But it's almost impossible for large companies with large internal IT departments and enormous sunk investments in legacy systems to jettison all that in order to migrate to a cloud infrastructure simply for the sake of promised efficiencies retrieved through shared services. "The cloud is a plain-vanilla platform," says Aird, "and that's just not going to work for larger organizations. They need to be customized. They have massive investments in their ERP systems. But for smaller organizations or start-ups, all they have to say is, 'We need to process invoices and we don't care how.'" Then, Aird says, that vanilla cloud can suit the organization's tastes.
Where There's a Person, There's a Problem
The remaining challenges to establishing a successful shared-services environment once a common IT platform has been achieved are, not surprisingly, the human ones. "It's resistance from people who own processes," says Boulanger. "The company says it's going to take finance and IT and HR out of the business units and centralize them, but the managers have relationships with these people. A plant manager says, I don't want to lose my pal Billy Bob in finance. Or my sister-in-law in HR. If I'm managing it myself, I can get what I want. If not. . . ."
"People in an organization think their value is the size of their kingdom," Aird observes. "If they manage a lot of people, they're valuable. But if you outsource or move to a shared service, you're downsizing their kingdom."
And it's not just the manager's feelings, or sense of themselves, that can be downgraded. Service can suffer without the commitment and discipline to make sure it doesn't. "Processing travel and expense is a transactional thing," says Aird, "but if you say I need an advance and you know the person, if the person is right there, you can get it right now. But if the T&E is offshore, it may take days. Most of us don't like the discipline required to do this kind of process."
A Job for the CFO
That discipline needs to come from the CFO. "Finance is where shared services start," says Boulanger. "There's lots of value in having accounts payable in one location. You don't need to have accounts receivable in 40 locations. There's lots of value in having the books closed in one location. It gives better visibility to process and controls. It helps the organization be compliant with Sarbanes-Oxley and other regulations. Lots of shared-services programs were launched as a response to Enron so CFOs could sleep better at night.
"So the primary influencer of shared services is typically the CFO. Lead by ensuring that finance is managed in a shared-services model," advises Boulanger. "Because this is a play that has the potential to have a significant impact on the whole enterprise. That's the CFO's role."
But, as Mike Holmes points out, none of this is easy.
"Would you like to move to Kuala Lumpur?" Holmes asks rhetorically. "I mean, it's a great place. Malay food is really good, a medley of Indian and Chinese, but. . .I'm an American."