Are EU Enlargement Countries a New Mecca for Shared Services?
Creating a successful shared services centre certainly depends on more than finding the right skills at the lowest possible cost. Other considerations – from time-zones through software licences to accounting regulations and language skills – will impact the sustainability, as well as the ongoing cost, of providing shared services to a group of companies or businesses.
But cost reduction is the primary driver for decisions to create shared service centres (76 per cent of European companies surveyed by The Hackett Group recently cited administrative cost reduction as their major motivation), so finding the right location, skills and infrastructure, at the best price, will always be the first consideration for any new shared services project.
The first SSCs in Europe were established by US companies who typically chose tax-efficient locations such as Dublin. These early SSCs, which focused primarily on accounts payable/receivable processing for a group of countries, were often co-located with treasury or co-ordination centres.
More recently, both the range of activities and of locations has widened. As well as accounts payable and receivable, now travel and expenses, payroll and some non-finance activities such as customer service are often handled by SSCs. And SSCs have also sprung up in new, low-cost locations in Europe – such as Glasgow, Liverpool, Barcelona, Maastricht – and more recently in Asia – in China, The Philippines and in particular, India.
These longer haul locations have attracted considerable attention, and some controversy, over the past year. India, in particular, has been so successful in attracting companies to set up transaction processing factories and customer service call centres that western public opinion has become concerned about the effect on home job markets. (In fact, research is indicating that jobs lost through offshoring are quickly replaced by either higher skilled jobs, or by jobs that are location-specific).
Eastern Europe has been somewhat behind India and other Asian locations in developing the outlook and the infrastructure needed for successful shared services, but that is now changing, as their markets become more open. This region – and in particular, some of the EU accession countries – are even being considered by Indian-based outsourcing companies looking outside their own borders for additional resources.
This is not because EU accession countries are cheaper than Asia. According to research by Shared Service Centres,1 fully-loaded per employee costs in Bangalore are just Euros 12,000, compared to Euros 21,000 for an employee in Prague (and Euros 50,000 in Dublin.)
But some of the EU accession states are attractive for a variety of reasons. In particular, they offer proximity to western European centres, and to the Middle East, and overlap with the US business day. To this extent, they are more accessible than locations in Asia. They also offer a relatively well-educated workforce at more cost efficient rates than elsewhere in Europe, with German language skills particularly abundant in this region.
And regulatory environments are moving closer to US/western European models. In fact, five of the 10 countries that joined the EU on 1 May 2004 – Czech Republic, Hungary, Poland, Slovenia and Slovakia – now have freely convertible currencies, permit intercompany lending and allow non-residents to hold local and foreign currency accounts.
Of course, these countries will also eventually benefit from membership of the Eurozone (2007 is the earliest date likely for this).
Our diagram shows progress towards open markets in Eastern European states; note that Romania is hoping to join the EU in 2007.
EU accession states, as well as some other Eastern European countries, clearly offer potential as locations for SSCs. The actual choice of location will depend on the company itself, its structure, its presence in different markets and so on. Examples of companies that have chosen EU accession states for shared services are Philips in Lodz, Poland, Diageo and GE in Hungary, and IBM in Budapest and Bucharest.
Once a decision has been taken to locate a shared service centre in an EU accession state, it will be necessary to ensure the framework is in place for success. To some extent, the concerns and requirements will be similar wherever an SSC is located, whether in Europe or beyond: implementing a common ERP platform, rolling out standard processes, understanding accounting regulations, ensuring consistent service levels, establishing efficient links to banking partners and clearing systems and so on. The devil – and the differences – will, of course, be in the detail. For example, bringing operations in Poland into shared service centres located elsewhere can be challenging because of accounting regulations, while Central Bank Reporting of cross border flows is onerous in Romania and Russia.
Banking support will be an early, and critical, decision. The services required are likely to be:
A one-stop, bulk payments/collections/information capability. The SSC will require the capability to send a single, bulk file from their ERP system to a banking provider or providers for onward processing through local clearing systems. It is worth noting that in most EU accession countries there is just one clearing system and one set of clearing rules, but with flexibility to prioritize payments.
As well as handling local/domestic payments, multicurrency cross border and multibank (MT101) payments, the selected service should also provide a two-way information flow, enabling electronic collections (i.e. direct debit) and statement information to be delivered for payment reconciliation and allowing for monitoring of transaction status.
In some countries (for example Poland) tax and social security payments require additional data and must be processed to precise deadlines; ideally, it should also be possible to handle these types of payments on an automated basis via a bulk payments capability.
Collections. As in other geographic regions, centralising collections is more challenging in Eastern Europe than centralising payments. Consumer payments are frequently made in cash, and the resulting paper initiation into the clearing system can lead to data capture anomalies andreconciliation problems. Cheques are not common in the region. So automating/consolidating paper and electronic collection data is likely to require specific solutions customised to take account of local practices. Although this approach may sound less than ideal, some worthwhile savings can still be achieved. For example, one of our clients in Romania is able to reconcile its accounts intra day, everyday to take account of incoming collections. As a result, the company has accelerated its collection cycle by around 16 hours and improved its day sales outstanding (DSO) dramatically.
Direct debits are available in certain countries today (notably the Czech Republic and Poland) and will become more prevalent across the region. Romania, for example, will introduce direct debits in 2005. The introduction and wider use of this instrument will also enable clients to improve their working capital position.
Central bank/special reporting requirements. Depending on the local regulations, banks may or may not be able to handle these on behalf of clients with shared service centres. But using tailored solutions from banking partners, (as an example, customs and excise reporting in Romania) can be a useful way to save time and complexity in the SSC.
Linking in to treasury. The overall benefits of SSCs are derived in part from more cost-effective transaction processing (through automation, standardisation and careful HR management) and in part from improved cash management (through centralisation and control of funds by the treasury). So ensuring an efficient account structure is in place and fully transparent to treasury (which will generally be located in another country, region or timezone) is important.
The ideal would be to bring EU accession states into existing liquidity management structures for euros and/or US dollar using automated sweeps to concentrate the funds into the preferred location (usually London, Amsterdam or the US). However, depending on the countries of operation, this will raise a number of challenges including currency controls and restrictions, central bank reporting requirements and the amounts of euros/dollars available (as opposed to local currencies). These considerations will determine whether centralising liquidity is achievable and cost effective in each case.
These days, SSCs are accepted best practice and their adoption has extended beyond just the very largest multinationals. This is in part thanks to web based banking and ERP systems, which in turn have enabled more flexible business models (“virtual” or “distributed” SSCs, as well as satellites or SSC “cells”, making use of standard processes but in different locations.)
At the same time, Europe is changing rapidly, and new countries will continue to offer opportunities (as well as challenges) to companies looking for the right location for an SSC, or seeking to bring operations in these countries into existing SSCs. For example, Russia and Kazakhstan, with their burgeoning oil economies, will increasingly have subsidiaries and trading partners outside their borders, especially in the Middle East. Bank systems able to facilitate local needs (such as interfacing to systems using the Cyrillic alphabet) will help to make centralisation of information feasible, enabling companies to take advantage of new opportunities. The story of SSC development in an extended Europe is only just beginning; paying close attention to this region now should bring rewards.
1 Quoted in Shared Services – Moving into Central and Eastern Europe, The Economist, February 2003