Strategy

SSCs: Are They Dinosaurs?

Poor project management, internal resistance, and lack of IT and process standardization may consign SSC projects to an evolutionary dead end.
Janet KersnarFebruary 1, 2003

If 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.

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

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.”

Yet finance chiefs often underestimate the amount of work an SSC requires. “If a company has any scale, the first few years are spent just setting up everything and migrating them to a center,” says Gibson of Gunn Partners. “Very little radical process improvement gets done for several years.” With that sort of horizon, SSC projects often lose momentum, he notes, adding that he’s seen many cases where companies “set up SSCs and just let them drift along.”

That’s something Pradheep Mathur didn’t want to see happen with his first SC rollout at Tupperware, a $1 billion, Florida-based maker of consumer plastic products where he’s been CFO since 2001. A few years ago, a benchmarking study revealed that Tupperware’s various accounting costs were exorbitantly high compared with other companies. The way to address that, Tupperware executives reckoned, was to set up a single, global SSC that centralized the firm’s general ledger.

A Fresh Start

It was a tall order — too tall, in fact. Tupperware is a long way from that ultimate goal, having just opened its first SSC to handle general ledger activities for its European businesses in a small town near Geneva. “It’s been like pulling teeth,” says Mathur.

Introducing the requisite standard chart of accounts and standardizing technology has taken a full two years to complete, and Mathur says the project slipped behind schedule by about 12 months. “It was a very different animal than we thought it’d be,” he says. “And it was only when we hired someone with experience — a full-time controller who had worked at an SSC for Motorola — that we realized just how far behind we really were.”

Now, according to Mathur, having an experienced hand onboard has put the project back on course, and every month that goes by he’s more and more encouraged by the progress that the SSC is making. “It would be wonderful if one day we could put all our general ledger worldwide into a single SSC,” he says. “But for now we’re happy to go slowly.”

Other CFOs are also happy with a step-by-step approach to their SSC rollouts. For example, Herbert Meyer, CFO of Heidelberger Druckmaschinen, says the $5.4 billion German printing-equipment company started a series of projects three years ago to begin developing a network of SSCs around the world, each devoted to centralizing IT, finance, or human resources activities.

But as Meyer explains, his greatest concern as CFO hasn’t necessarily been the speed of the projects, but that the end result would leave his SSCs taking on a life of their own. “We didn’t want to end up with big bureaucracies, sitting far away from the parts of the company that they’re supposed to be serving,” he says.

With that in mind, Heidelberger Druckmaschinen has developed not one, but several types of SSC organizations, “to ensure the best fit according to a particular process.” So IT services, for example, sits within three SSCs — in Wieslach, Germany; Rochester, New York; and Singapore. Another project, meanwhile, focused on finance, and puts all the group’s treasury functions from the 170 countries where the firm operates under one roof in Heidelberg.

Chopping and Changing

Another concern that CFOs voice is that their SSCs are at risk of becoming stagnant, unable to evolve alongside the company. Not so at Oracle. CFO Plant says, “we’re always changing what we put in our center. If there’s a problem that cuts across countries, I’ll get a call to see whether Dublin can handle it.”

It wasn’t always that way. Plant concedes that it took his team a few attempts before the SSC began running smoothly and was able to convince other parts of the company that the SSC was up to scratch. Plant found that getting buy-in from local finance managers, in particular, was much harder than he had anticipated. The result was that Dublin often found itself in a tug-of-war when it came time for country-level processes to move into the SSC.

After four years, however, the SSC is running according to a strict migration regime. “We now need only 11 weeks to move a country into the SSC,” Plant says proudly, adding that once a country’s back office has migrated to the SSC, “it’s given a three-month adjustment period, and after that, there’s absolutely no room for duplication.”

While quickly identifying the processes that can migrate to an SSC environment has been vital for Dublin’s success, so, too, has been its ability to adapt and allow a process to move back out of the SSC and return to the country level. A case in point: credit collection. “We decided that for us, it was too language-dependent and really belongs with the individual countries.” says Plant. “But I have no regrets about putting credit collection into the center. It allowed us to standardize procedures and transferred knowledge.”

Jürgen Reiners, global shared services director of Hewlett-Packard, has gone a step further than his Oracle counterparts. Reiners, who’s currently moving the back office of newly acquired Compaq into HP’s SSC structure, has spent a large part of the past ten years both opening and closing SSCs for the $73 billion U.S. computer giant.

Having set up a Stuttgart-based SSC for HP’s German offices in the early 1990s, Reiners says that by 1995, the firm’s vision grew bolder as it began to shift its SSC strategy to become pan-regional rather than country-based. It wasn’t long after that that Reiners was charged with migrating ten processes from 23 SSCs in EMEA into one, large SSC in Brussels, and then turning all the old SSCs into front offices. With centers in Brussels, Colorado, and Singapore, Reiners says the next evolutionary step was to push the strategy towards a more global focus. “At that stage, we had to really re-invent ourselves,” says Reiners.

Today, Reiners oversees four global centers. The main hub is “offshore,” in Bangalore, India, which covers the bulk of the high-volume, low-value transactions. “This is where we want to achieve the cost advantage,” he says. There’s also a backup offshore center in Guadalajara, Mexico, and centers in Barcelona and Singapore, for language-dependent processing not supported by the two offshore SSCs.

And as at Oracle, HP’s center continues to broaden its scope. “It’s been a huge success within the company. We decided to build not only a finance and administration center, but also a center for all kinds of administrative activities like procurement and order processing. And over the next two years, it’s very likely that we’ll be moving contract management,” Reiners says.

As he sees it, the firm’s obsessive focus on measuring the progress of each SSC project has held the key to its success. Time, too, has played a role. “We now have 12 years of experience and it’s become part of our daily lives,” he says. But above all, he adds, “we’re really good at learning from our mistakes. But believe me, it was bumpy at first.”

A New Line of Defense

Standardize, standardize, standardize. That’s the mantra among shared service center (SSC) experts, who believe standardized IT systems are vital to run an SSC efficiently. But what happens if a company isn’t able to standardize its systems? Should it abandon all hope of ever having a world-class SSC?

Not necessarily. But a little over a year ago, Trevor Smallman began asking himself those very questions when he took up the post of financial controller for shared services at Thales UK, a company that provides electronic systems and industrial electronics for the defense, aerospace and IT industries. Having inherited a small, U.K.-focused finance SSC, Smallman was asked by his bosses at Thales Group in France to expand its scope to serve more parts of the $11.1 billion firm.

That wasn’t so straightforward. Thales’s U.K. businesses were spread across more than 60 sites, and plans to standardize their eight financial platforms into just one had been put on ice. “I was constrained by the fact that we didn’t have a common platform, so I began to look around to see what else the SSC could do for the company,” he recalls.

This was where Thales’s “common efficiency teams” came in. Thales’s headquarters in Paris had recently set up these small, cross-functional groups to find ways to reduce costs across its supply chain. When Smallman heard that one of the ideas identified by the teams was to streamline the procurement and management of the firm’s portable measuring equipment, he immediately saw how his SSC could help.

Teaming up with external consultants, Smallman’s staff first set up a database to provide an up-to-date overview of all the equipment used by the U.K. sites. Now the SSC maintains the database, while also handling the administration and invoicing for equipment purchases. “It basically makes us a one-stop-shop for calibration and testing equipment,” says Smallman. For Thales’s managers, it means quick, easy access to information to help them make more accurate purchasing decisions and share resources with other parts of the company.

There’s another benefit. Before centralization, the firm had some 60 separate contracts with various measuring-equipment service providers. Now, thanks to some savvy negotiating on Smallman’s part, the entire U.K. group has just one, more cost-effective contract with a firm called IFR, which the SSC oversees.

“This isn’t a pie-in-the-sky exercise,” says Smallman.” We have reduced our costs by more than E1 million [$1.08 million] in the first year, and expect to double the savings in 2003.”

Smallman has more plans for his 30-member SSC team. One of his next projects includes streamlining the billing and usage data the firm needs to manage its telecoms budget. “It’s been a natural progression for our SSC,” he adds. “What we’re offering is to come in and provide a service, with quick benefits and without the need for radical change.”

New Frontier

As any shared-service-center director will tell you, one thing that all SSCs are really good at is being the company scapegoat. SSCs might improve internal service levels, slash processing costs, and even help accelerate intracompany reporting. But let’s face it, says Peter Moller, shared services team leader for Europe and Africa at Deloitte & Touche, “there’s still considerable adverse internal feeling towards the SSC.”

Ulrich Hildebrand couldn’t agree more. But less than a year into his new job as director of the finance SSC for GM Europe, Hildebrand is already working on a way to win this “continuous PR battle.” His idea? Process Guardians. “My vision for the SSC is for it to become the ‘process guardian,’ monitoring the entire order-to-pay process, not just as a service provider but as a ‘process owner’,” he says.

Though it might sound like something out of a Grimm fairy tale, there’s nothing make-believe about the vision that the Barcelona-based German has for GM Europe’s four-year-old SSC. The center is now run under a new global outsourcing contract with Affiliated Computer Services, handling the accounts payable (AP) and accounts receivable (AR) services for Vauxhall of the U.K., SAAB of Sweden, and Opel in Germany, along with general ledger, fixed asset activities, and travel and entertainment accounting services for some units. But part of the problem that the center has always suffered from is the lack of knowledge sharing between the SSC and the rest of the company. Take the order-to-pay process. The SSC “is at the end of this process and depends on the input from, say, purchasing or logistics to pay efficiently. If the process doesn’t work properly — for instance, if a price or goods receipt isn’t recorded in the system — who gets blamed if the payment can’t go through? The SSC.”

That’s why Hildebrand wants the SSC to begin working more closely with local staff “to identify the bottlenecks and help fix the process together.” Within the next few months, a feasibility study should be complete, giving Hildebrand a better idea about how this can be done. But the challenge will clearly be a big one, given the size and geographic mix of the European division of GM, the $187 billion U.S. carmaker.

Hildebrand is undaunted. One of his ideas is to beef up the firm’s performance management program so that he has more say in the annual performance targets set for individual local finance staff. That would certainly include metrics concerning the quality and timeliness of the information sent to the SSC. Another initiative involves developing a coaching program so that local AP and AR departments can share their expertise with the SSC staff, who in turn might even spend a few weeks each year working at the various offices around Europe. As Hildebrand sees it, the more interaction between the “Process Guardian” and local finance staff at GM Europe, the better. After all, he says, “these people can validate how good we are.” That sounds like good PR.