Headcount down, operating costs cut by 30% or more, corporate taxd, in certain circumstances, considerable tax advantages. But how do you decide the best place to put yours? rate reduced by several percentage points – it sounds like every finance director’s sweetest dream. Yet this is what shared services are all about and it is why major multinationals, particularly US companies, are clustering their European back office operations under one roof.
Companies using shared services centres (SSCs) in Europe are achieving cost savings of tens to hundreds of millions of dollars a year, says Marcie Krempel, director of Euro Group Consulting which prepared a report on SSCs for the Economist Intelligence Unit. “Mobil has reported a $1.26bn annual saving from its five global shared services centres,” she adds.
A recent survey of 120 major multinationals operating in Europe showed that 75% were already utilising SSCs or had implementations underway or in the planning stage.
An SSC offers a company the opportunity to shift its back office functions from high tax locations like Germany or France to the friendlier tax environments of Ireland, Switzerland and the Netherlands. Ireland, in fact, is becoming the favoured re-location choice of companies, followed by several regional UK cities and Amsterdam. “An SSC strategy is rarely driven by tax planning alone but it can produce real and substantial tax savings,” says Geoffrey Kay, international tax partner at Baker & McKenzie. “A company can achieve this by re-locating the risk associated with certain business activities, hence it is possible to shift the reward, meaning profits, out of a high tax country and maximise tax efficiencies.”
The concept of the SSC is a significant threat to countries with high tax structures. A company will still need to maintain a sales and marketing function in each country where it operates, but everything else can be shifted to a low tax environment.
There is a perception that the trend to SSCs has taken off in Europe largely with a view to taking advantage of next year’s introduction of the single currency. “The euro makes SSCs more sensible than before as people see the eurozone as becoming one market, and this is creating a new European business model,” says Peter Moller, partner in charge of European shared services at Arthur Andersen. “The back office business can be pulled out of the national mould and the euro will bring transparency of pricing and it will be cheaper to operate a back office facility in one currency. But it is not the prime driver.”
It is all about cost savings and Christine Vargas, SSC project manager at US IT systems company PeopleSoft, says her company has targeted a 30%-a-year cost reduction at its Amsterdam SSC which will begin operating in December. “We took the decision to be able to focus on our core competencies, enter new markets, apply best practices and improve our customer servicing procedures,” she says.
Finding multi-lingual staff is one of the main challenges facing companies pondering a move to an SSC. Keeping them is another – the attrition rate is high among back office staff. More importantly, many executives express concern over the decrease in local knowledge and high running costs associated with SSCs. Then there are employee re-location and redundancy costs, as well as obtaining legal advice. The cost of relocating to an SCC averages $1m to $5m without taking account of any major IT changes.
Hence a key consideration in setting up an SSC is economy of scale. It is not a viable alternative for everyone, given the high start-up costs involved and the two- to three-year time scale normally involved in re-locating to a new greenfield site. “A company with a turnover of less than #100m a year would probably not benefit from setting up an SSC,” says Allan Robb, a partner at KPMG. “You need a scale where the cost savings achieved will meet the investment required.” Robb stresses that an SSC is not merely an exercise in centralisation. “The culture of the idea is that the SSC is meant to be servicing the organisation, so it is not just about data processing,” he says. “Geography is not such a big factor for an SSC,” he says.
Robb says that companies generally don’t set up SSCs in countries such as France, Italy or Germany because of rigid labour laws, higher wage costs and language difficulties. “The real issue is where to find the skills, and in this Britain and Ireland benefit from relatively low labour costs as well as their good customer service mentality.”
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