Two approaches that are increasingly being taken by financial directors to improve the quality of finance services and reduce costs are financial shared services centres and outsourcing of finance processes. But goals for both service enhancement and cost reduction can be achieved only if organisations understand that success depends on following a number of critical success factors (CSFs).
First, we look at the CSFs for shared service centres. According to Leland Forst of Amherst Group, the first CSF is that organisations need a clear, defined understanding of what they expect from the shared services centre.
“They need clarity of where they are going and what success means,” he says. “Basically, making the business case.”
The business case, as Business Intelligence research finds, must include detailed information on expected cost savings, service levels and improvement targets (critical for gaining business managers’ buy-in). Benchmarking can play a key role here, as it did in the case of the Royal Bank of Scotland, which found that by comparing its own in-house data with external benchmarks, it could not be considered best practice and was spending too much time on lower value-adding work, therefore leaving gaps in decision-support provision.
At Whirlpool Europe, the case for setting up the centre was part of a wider European restructuring of financial operations. It came out of a working group’s recommendations to keep business planning and analysis close to the business and within each country organisation (in essence, providing a business partnering role), and centralising (at a single European location) all transaction-processing activities that would have as a key goal the delivery of enhanced services at reduced costs.
The centre, says Steve Freeman, director of Whirlpool Europe’s shared services centre, has to be seen as a business in its own right and not just a centralised back-office function. As a business, therefore, the centre must have a customer/supplier type relationship with the business units it serves. Indeed, according to the US-based benchmarking services provider Gunn Partners (which at the time of writing was in the process of setting up a shared services benchmark), there are three key areas that a company must consider when taking a shared services approach.
– Strategic: considerations like the business plan, centre culture, technology and systems.
– Organisational: elements such as roles and responsibilities, work-team structures and training.
– Performance: dimensions such as actual performance, customer service standards and economic value measures.
Organisations that believe a shared services approach is, in essence, a straightforward relocation of staff would do well to consider the planning and implementation implications of these three business dimensions.
As a second CSF, Forst states that it is important to understand the present total costs of service at the outset. “No company we have worked with has known the total costs of the services they deliver,” he says.
Benchmarking data, as discussed elsewhere in this report, can play a key role here in calculating the full process costs. Just as with any finance processes, an end-to-end scoping of the process, which includes aspects that sit outside the finance function, will be necessary to make an accurate calculation. It will also be critical if the organisation wants to re-engineer the processes successfully.
In short, therefore, visualise what the centre will look like, understand what it will do, scope the end-to-end processes, recognise that process change often requires commitment to change outside the function (senior management sponsorship is normally critical here), re-engineer the processes, benchmark present process performance against external data, and then set the centre’s performance and improvement targets.
As a third CSF, Forst stresses the absolute importance of robust service-level agreements (SLAs) and productivity targets. If thought through fully and managed effectively, these should delineate accurately the scope of the services the centre will deliver and describe clearly the expected levels of productivity.
As a final CSF, Forst stresses the importance of organisations fully accepting that this is a long-term change process. He states that a key reason for failure is that many companies simply remove employees from one place, sit them in a centre and expect everything to change for the better, and then wonder why it has not. “Too many people see a shared services centre as being just about cost, efficiency and productivity,” says Forst.
Although he stresses that such dimensions are important, Forst says that long-term success is more about creating a centre culture that has a service orientation with, as its central philosophy, a desire to meet and exceed the needs of customers effectively. “It’s about transforming the attitudes of people from a back-office mentality to one that is customer-focused and committed to the goals established by the centre in consultation with the business,” he says.
According to PricewaterhouseCoopers partner Kurt Meisenbach, an overarching CSF when outsourcing is to ensure that the culture fit is right between the organisation and the outsourcer. “Remember, you are not purchasing a commodity but a highly personalised, relationship-driven service.”
Meisenbach also makes the important observation that organisations should avoid the pitfalls of entering into a lengthy paper interface with potential partners during the procurement process. He says that in the outsourcing arena everything is tailored, so in the procurement process companies should not try to work out every contractual detail and set every SLA.
He feels it is more important to get to know the provider and then focus on the detailed service specifications once the relationship is understood.
Meisenbach emphasises that detailed service specifications are important and considers that the second CSF is to ensure a robust model of finance process costs. As with shared services centres, this means understanding the full end-to-end process costs. Doing this for Elf Oil UK’s finance processes was, says finance director Ian Porteous, the biggest audit the finance function ever had. “We went through with a fine-tooth comb every service finance delivered and identified, and agreed on the real total costs of the service – both direct costs and indirect costs that are often in somebody else’s budget, such as training.”
Developing such a detailed understanding of costs enables the partners to set cost performance levels that stand up over time. It also enables the setting of meaningful targets for cost reductions from which, crucially, both partners should derive benefits. Basically, if both sides stand to benefit financially, then each will be incentivised to work together to effect cost reductions. This is an important dimension of the third of Meisenbach’s CSFs – instilling a partnership culture focused on the improvement of finance processes.
Key here is that working relationships between the partners should be clearly defined at each level and that both partners can see the benefits to them of improvement. Creating such a partnership culture requires the development of an open, honest and transparent relationship in which both parties are working to a common agenda. Using a balanced scorecard for an outsourcing partnership, for example, can go some way to agreeing this agenda. Key to scorecard formulation would be the creation of robust performance measures, which is the fourth CSF.
It is crucial to formulate robust performance measures, such as SLAs, operating-level agreements (OLAs), the services the host company has to deliver in order to deliver to its SLAs, and key business indicators (KBIs) for overall accounting performance in order to succeed with the outsourcing partnership approach, as Meisenbach and other advisers and practitioners interviewed constantly stress. Robust performance measures delineate what both partners must achieve if partnership success is to be achieved and also enable the avoidance of disputes over what is, or is not, expected as part of the agreement.
Meisenbach’s fifth CSF is the involvement of all staff in creating the new processes and setting the performance measures. Involving staff from the outset and throughout the creation of the new outsourced organisation helps ensure buy-in to the new working arrangements. It significantly lessens the threat of losing key staff during the complex, often stressful, transition phase.
Meisenbach also provides critical success factors in vendor selection.
These, he says, should include the following:
– Qualifying the technical capabilities of the contractor to ensure they have the relevant experience and the critical mass to deliver what they say they will deliver.
– Ensuring the provider has the flexibility to deliver services that fit the host organisation’s requirements.
The Outsourcing Institute’s survey of outsourcing users found that the top-10 factors in vendor selection are as follows:
1. Commitment to quality
4. Flexible contract terms
5. Scope of resources
6. Additional value-added capability
7. Cultural match
8. Existing relationship
This all-encompassing list includes the key CSFs pinpointed by Meisenbach, although the cultural match would appear higher than seventh on his list.
It is interesting to note that the Institute’s findings seem to contradict the same survey’s finding that companies outsource first to reduce and control operating costs. However, it may mean that companies recognise that cost control and reductions are possible from outsourcing but that the key factor in achieving this goal is the commitment to excellence from the provider.