Listen to this article
Few sections of the corporate structure have undergone such a seismic shift as the back office in the past 15 years. And few people back in the 1990s foresaw that centralising some humble paperwork across the organisation – sharing the service – would lead to radical changes in the way companies and governments organised their operations.
Back then, sharing administrative services was seen primarily as a cost-cutting measure, suited particularly to large multinational operations. Pioneers such as Ford recognised in the 1980s that it made no sense to pay all of their thousands of suppliers and collect from their customers at hundreds of accounting centres across their global networks. With rationalised systems and better information technology, they could cut the number of centres down from hundreds to a handful.
Today, in spite of the sceptics, costs are still being cut, and services re-organised and shared. Smaller companies as well as the multinationals are adopting the shared service structure, whereby support functions that are common to multiple units within an organisation are consolidated in a single provider. This includes routine operations in HR, procurement, logistics, estate management, customer communications, and even marketing, as well as the original finance and accounting functions.
The effect has been dramatic. According to the Hackett Group, a business process advisory group, with some related changes, such as advances in technology and improvement to financial processing systems, shared services have halved the median cost of the finance function across business as a whole from 2.5 per cent of total revenue to 1.25 per cent. Governments are also impressed, and are beginning to see how much scope they have to cut waste by sharing administrative processes among their many tentacles.
The logic for shared services has matured. A unified accounting system can save money, but it also produces a step change in management information and analysis. As long as definitions of sales, overheads, even of “employee”, vary from unit to unit of a large group, comparisons of performance can only be difficult and tentative. With a single shared system, staff are quickly able to investigate, compare and analyse the corporate data that are accessible for the first time.
The finance department can thus promise a better service to line managers and the board, and reassure them that the company is conforming to the demands of the Sarbanes-Oxley Act, to the International Financial Reporting Standards and to the rising demands of other corporate governance regulations. Further, the integration process following an acquisition is likely to be much less frenetic if well-tried unified systems are in place.
In more practical terms, consultants say substantial cuts in administrative costs to the order of 20 per cent or 30 per cent are commonly achieved within two or three years, derived from, perhaps, a 50 per cent reduction in staff (some of whom can be redeployed on more constructive work). For example, productivity in the new processing centres typically increases from a level of about 10,000 invoices processed per person per year to 25,000 or even 50,000. Intel claimed early on to have cut the cost of processing one invoice from $8 to less than $1.
For companies hard pressed to improve their performance and keep the shareholders happy, such results are like water in the desert. Savings do not always live up to expectations, and investment in modern IT systems and enterprise resource planning may be heavy, but they explain why more services are being shared more widely.
Hard figures are scarce, but it seems practically all major companies have now installed shared services in some shape or form. Information technology services group Capgemini believes that 20 per cent of shared service centres (SSCs) are less than a year old and a further 40 per cent are under five years old, suggesting that many have yet to reach maturity or to extend to all the company’s operations. IBM says that the creation of new centres hit a peak in 2000, but after a lull, the trend in 2005 was sharply upwards once more.
At the same time, the UK’s public sector is showing all the enthusiasm of the newly converted. Research group Ovum forecasts explosive growth. It foresees a compound annual growth rate of 29 per cent in the UK government’s purchase of consultancy services over the next four years, covering systems integration, training and testing of shared service functions.
Admittedly, the public sector is starting from a low base by current private sector standards, and governments in general are not as free as the private sector in one crucial respect: the ability to place SSCs wherever labour costs are lowest. But the potential savings among, say, local authorities and NHS trusts are correspondingly massive.
The combination of high skills and low wages is ephemeral, however, even for the independent sector. The old favourites for locating SSCs, such as Dublin, Budapest and Bangalore, see their resources of skilled staff dwindling and salaries rising in consequence. One current favourite is Manila, where costs are less than half what they would be in a European capital, and where foreign language skills are sufficiently high.
Many companies have found the cost advantage to be disappointing when all factors are taken into account. They are also discovering the limits to the quality of service an offshore centre can offer. Voice communication with customers, for example, demands high standards with well-trained staff, and this does not come cheap.
Thus, some businesses, such as car hire company Avis Europe (now separate from Avis in the US), limit their offshore SSCs to non-voice communications with customers – online bookings, standard letters, e-mail and so on. They have learned that the disciplines to be applied to volume processes such as invoice-to-cash or accounts payable are a stumbling block for staff when communicating directly with customers.
In these cases, building the company’s business and reputation is a marketing function that must take precedence over cost and productivity measures. Call centres like those of internet banking group First Direct, which handle 40,000 calls a day, are the foundation of the business and are managed accordingly: they are based firmly in the home country, and are not cost centres attached to the finance department.
In some companies, SSCs are treated as profit centres even though their customers may be internal. Eight years ago, Procter & Gamble elevated its shared services operations into a separate division under the name Global Business Services. Under the company’s chief executive, AG Lafley, it ranks in status alongside the two core business divisions, the Global Business Unit and the Market Development Organisation.
The Global Business Unit encompasses all of the company’s back-office services, its supply network and packaging control. Mr Lafley’s aim is to speed up the group’s relatively slow rate of product innovation, and to this end, Global Business Services runs the global enterprise platform – the systems that support all its products from concept to delivery.
Global Business Services also includes innovation and business strategy planning, tackling particular operational problems like cutting the testing time for a new product, and tracking its progress through the organisation. The claim is that Global Business Services has already reduced the group’s operating costs by $500m – and there’s plenty more to come.
What Procter & Gamble and some others have done in effect is to abandon the traditional way of splitting the organisation, along geographical, functional or product lines, in favour of a more military formation, with two line divisions backed up by an enlarged service division. Old-style country managers with their own accounts departments have long since disappeared.
Some observers advocate going one step further still, to view the company as a series of services – each, in effect, its own SSC – that are combined in varying ways to meet customers’ needs more cheaply and effectively.
At last, it seems the logic of computing and IT power is being reflected in the organisation. It’s been a long journey since the first services were shared two decades ago.
Get alerts on Front page when a new story is published