Imagine a grocery store chain with numerous stores across the country. Each store needs someone to process payroll, pay vendors, and carry out other key finance processes. Rather than hiring staff for accounts payable or payroll at every store, the business is likely to be part of a growing number of organizations choosing to move these and other common processes to a shared services center (SSC).
SSCs provide a centralized team that carries out high-volume, repeatable finance processes on behalf of business units across an enterprise. Organizations commonly choose this model to achieve:
Process standardization and process improvement
Improved financial outcomes
Lower labor costs
Smaller office space footprints
Not all SSCs are created equal. Some operate far more productively and efficiently than others. When viewed alongside other SSC performance measures, the total cost to operate an SSC gives CFOs a good sense of whether SSC spending is producing the efficiencies organizations expect.
APQC’s data for this measure shows that organizations at the 25th percentile (the best performers) spend $1.90 for every $1,000 of revenue to operate their SSCs. That’s half of what organizations at the median spend and less than a third of what organizations at the 75th percentile spend.
An organization in the 75th percentile with $1 billion in revenue stands to save nearly $3 million just by moving to the median percentile for this measure.
At the same time, it is also worth noting that there is a point at which cost-cutting becomes counterproductive. A company could aim to spend just a nickel for every $1,000 of revenue on its SSC, but it might be setting it up for failure.
Without more data, we also can’t say that every company at the 75th percentile is doing something wrong or underperforming. A company could have just launched its SSC or invested in systems that will eventually bring greater efficiencies and lower operating costs.
Performance on this measure should be balanced alongside other measures, like cycle times for key processes, the number of employees needed to carry out processes, and first-contact resolution rates. That helps organizations see whether they are spending or saving in ways that ultimately benefit the business.
Keeping Costs Lower
Our SSC benchmarking research (sponsored by ScottMadden and administered by APQC) finds that top-performing SSCs have standardized, well-documented processes, efficient and integrated systems, well-trained staff, and accountability. The differences between top-performing SSCs and a comparison group are the most pronounced in transactional processes like invoicing and general accounting, where top performers are more than twice as efficient.
For example, in top-performing SSCs it takes 4.1 full-time equivalent employees (FTEs) per $1 billion of revenue to invoice customers, while the comparison group uses 11.3 FTEs. We also found that top-performing SSCs share the following traits:
Handling of inquiries by dedicated finance employees, resulting in higher first-contact resolution rates
Greater use of technology, including heavy investments in vendor portals, enterprise resource planning systems, and robotic process automation
Greater end-to-end process adoption
Global process governance, global process owners, and higher use of service-level agreements
If the costs for your SSC are higher than you think they should be, look for opportunities to improve processes and process management. Automation of high-volume, transactional processes wherever possible, for example, avoids the kinds of errors and mistakes that can easily ripple across the organization. Tamping down variations or exceptions to processes is another worthwhile improvement. If an exception becomes the rule and a process has to be done a different way for each customer, the company loses the benefits of shared services.
Good structures, practices, and technologies help to lower the costs of operating an SSC, but they do have an upfront expense. As the company invests in improvements, the cost of the SSC may rise temporarily but it will decrease over time as finance achieves greater efficiencies.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston.