Cash Management in Asia
JC: Singapore is the hub for Asia-Pacific. Right now our US headquarters is going to shared services because many large companies are going down this route and there are a lot of benefits…especially economy of scale and expertise for best practices. I am here to try to learn from people who have gone through it.
SC: We are a network service provider to airlines and multinationals. We have a shared service centre (SSC) in Singapore for Asia-Pacific. We have three SSCs globally— one in the US, the UK and Singapore. In Singapore, we serve all of Asia’s accounting, receivables and everything else.
We run our own shared service centre and service 13 countries in Asia-Pacific. But not every operation is big. Major operations are Australia, Singapore, Tokyo and Korea, China and Taiwan. We have joint revenue arrangements for some and do not have full-scale operations in those countries. Because we are in the network business, we can connect everyone to a shared service centre. The paperwork is still maintained in the country but the copy is put on the system and communicated across the world. I have one person in every country doing administrative work and all the documents are put on the system for Asia-Pacific.
AG: How do you handle the legal side for things like statutory accounting?
SC: For tax returns we have in-house accountants that do the regulatory filings and the original documents are all stored locally. It’s a challenge making the auditors accept that they have to do all the auditing for each country in Singapore and, so far, we have been able to get that done. To the auditors, it is still a foreign concept. All the statutory accounts are done in Singapore at the shared service centre.
AG: Singapore is the regional centre for Asia-Pacific and today we have two shared service centres already operating. We have one in Holland that services all of Europe. We centralized the whole of logistics and have a central warehouse servicing the whole of Europe. An excellent, dedicated transport system connects all the countries in Europe. Then we went to the shared service centres. Europe, in a way, is one country in the way things work. All the accounting is centralized. We have one in the US that covers the US. Today we are looking at establishing a SSC in Singapore for Asia-Pacific. We are looking at Singapore because when you talk about a SSC it is a high-value service and I don’t think that cost is the only issue.
When you outsource to cheap countries, you need a certain minimum number of people to make it work. Then it is not cost-effective. So we decided to locate it in Singapore. This decision is not only cost-driven, but driven by the need for a high level of integrity and skills.
Now in Asia, we are reducing the number of banks we use. In some countries we have six to eight banks, which is a waste of time for the bank and the company. We have said, basically, maximum two banks. In each country they must get all the systems and processes working effectively and then we will bring it to Singapore. We also want to centralize reporting and accounting, and payments and receivables will be in the next phase.
AG: If you have business all over Asia, how do you get the language issue resolved in Singapore?
SC: We just hire Korean, Japanese and other Asian language speakers we need in Singapore. You have to be able to communicate with the customers, someone must be able to pick up the phone and answer in Japanese and the rest is all electronic. So it is transparent to our vendors and customers.
RJ: Have you centralized the accounts receivable collections function? This is one area where there is a lot of debate about whether centralization adds value.
SC: I think it depends on the business. For Equant, a lot of contracts are negotiated and agreed on a one-centre basis. As opposed to a company like BAT, you need strong sales people in a country that can double up on collections and, in that case, chasing debts would be tricky.
JC: It is a real challenge for my company in Japan. When we looked at a SSC requirement, we thought we could only use it for accounting (and US GAAP financial reporting) in Singapore, and the payments and collection have to be in Japan. This is because customer visits are very important. For my company, I don’t believe we can do the collection from Singapore (for Japan). We do it for the rest of Asia but not Japan.
SC: I have a contrarian view. It can be done. You have to recognize that the final people who pay are the accounts payable people. And it’s about understanding their cycle and tapping into that. As we make all payments, we tell people to pay up electronically and we may send paper payments electronically. Collection is email and calls. If your email is in the language or the calls from a local-language speaker, we do not have a problem.
RJ: Have you invested in a common accounting system/ERP?
SC: Yes, that is the key. In-country they get access to the system and don’t post any accounting and transactions…everything gets inputed and is transmitted across our networks.
JL: In terms of a financial SSC, we are at the embryonic stage. In Europe, we have SSCs set up in Belgium for accounts receivables and in the UK for accounts payables. For IT SSCs, we are currently operating in Brazil, Germany and Malaysia. We are currently in the process of setting up a financial SSC in Asia and are working on the drivers of the SSC model. The questions that shape the drivers would be what the main benefits of a SSC would be; is it mainly for cost savings or is it for better controls through common systems and processes, or a proportionate mix of both? We actually started looking at SSCs for Asia four years ago and have since implemented a small-scale SSC based in Singapore servicing Vietnam, the Philippines, Singapore and Thailand, for some of the accounting functions. We are now looking to expand it to a regional basis to include the big markets such as Malaysia and Australia. Although the benefits of outsourcing have been well documented, each potential market requires comfort that outsourcing will not be detrimental to their domestic business. Hence, the choice of a country where the service is provided is deemed important.
Moving forward, issues such as how to integrate the SSC, the functions to outsource and how we want to manage the systems that will drive the commonality for the SSC will be required to be bedded down first. With a clear execution plan, this will instill confidence in markets that the SSC has the right framework and resources to effectively manage differentiated markets.
RJ: But won’t centralizing the back office processes allow them to focus more on their clients and market opportunities?
JL: Companies do see the benefits of outsourcing/insourcing, but they are cautious that in doing so, it does not eliminate any of their tactical advantages that they may be enjoying currently. They would also want the choice of the outsourcing location to be culturally and linguistically compatible with their business environment. This SSC must also be set in a location where we are already having a significant operating presence.
JC: I believe the culture is very important. Like in Japan, the credit manager has to go play golf with the customers and they need to go for drinking sessions. The customers expect that. They do not open up to you until you are friends with them. Right now, I am facing challenges in Japan. We have 13 banks for Japan just because customers want to use their preferred banks.
JL: It’s not that much different operating in the rest of Asia as in Japan. Some customers have more bargaining power and, in such cases, we may have to open accounts with our non-panel banks. We would just have to manage around customers’ banking requirements.
AM: How do you manage the cash flows?
JL: We usually work very closely with partner banks to get ideas on improving work streams around the strengths of the bank. In South Korea, for instance, we have a high number of bank accounts (as required by customers) and the challenge here is to find a solution where the headquarters in Seoul has visibility to all that cash through a streamlined cash-management system. That is where an international partner bank with domestic reach comes in and works with us to put in a solution to improve efficiency and reduce the number of operating accounts.
AM: How do you cut down the number of bank accounts?
AG: When I came to Singapore in 1989, one of the first things I did was go through all the bank accounts. I said we have to reduce the number by 50 per cent. In fact, by just asking a few questions it happened very, very fast. Last year we introduced a system where the bonuses for some of the finance managers were tied to the number of bank accounts. You achieve success by this. Today we have very few accounts, except for Korea where we still have more than 10 accounts.
AM: Is it more difficult to consolidate accounts in Korea?
AG: It is difficult, but if you follow it through it’s possible.
JC: For Asia excluding Japan, we only have two bank accounts for our customers to use. One in Singapore and one in Hong Kong. The customers in China pay through the Hong Kong bank account. The customers for the rest of Asia (ex-Japan) go into an HSBC account in Singapore. We’re able to do that because we structured it so that the revenue flows through only two legal entities for Asia (ex-Japan) – the Singapore and Hong Kong legal entities. It depends on how you structure the company.
AM: When you get the accounts centralized and consolidated, is that a starting point to centralizing other processes?
AG: Consolidating bank accounts was not driven by the concept of SSCs. It was driven by cost. In the past, all the finance people had to talk to the banks and have a relationship. Now no one has time for that. Now no one can open a new bank account without an approval from headquarters.
AM: What about product development for SSCs? What services would you like to be changed or have more focus on in order to get to the ultimate SSC?
SC: I would say more technology for pooling of accounts, so we don’t have funds floating around the region. And bank confirmation for audits done through a central hub, as well as having web-based tools rather than having to log on with everything you want to access. Otherwise, we have funds sitting in different HSBC accounts and have to move them around. Notional pooling will help this.
AM: How do banks keep up with providing new products and meeting customer demands considering that it is so capital-intensive?
RJ: I agree that cash management is a technology led business and needs continual investment. To fund this programme, banks require volumes and scale, so this is increasingly becoming a market for the big providers, such as HSBC. The focus of the investment is to increase our ability to deliver and receive information seamlessly, as well as processing transactions efficiently. The banks are working with their clients to understand how we can add value to their processes in order to help secure and develop their competitive advantage. The challenge is to understand the strategic issues for our clients so that our technology is moving ahead of your needs.
AM: Aren’t cash management systems supposed to reduce and find these hiccups? How much can SSCs actually help something like this? What is your advice to people setting up SSCs? What do they need to look out for?
JC: We faced some problems on timely updates of bank receipts as it affects the DSO (day’s sales outstanding). We have collections that come in at the end of the quarter, sometimes on Saturdays. If there is no visibility for these collections on the electronic bank statements, we request HSBC to immediately inform our collector through phone calls if the amounts are above US$50,000.
RJ: One benefit you get from centralization is standardization of process: you can be sure that events happen in a specific sequence so meeting internal control parameters. In addition information is reported in a consistent manner, which gives you great assurance in what is transmitted to banking partners, customers and suppliers, as well as being recorded for management information and accounting.
JL: The biggest immediate benefit of shared services is in the application of a consistent standard. We have a high number of ERP (enterprise resource planning) instances across the world, and reducing the number of operating systems is a quick win for us. Having a centralized process and one audit instead of multiple audits are all part of the benefits we see.
If an SSC is purely a drive to improve standardization and controls, the gains are clear. But when you put in cost as another performance variable, the parameters and consideration factors increase, and this is where we get questions on how we can do it better and still achieve cost savings.
AG: I have seen the benefit in our organization. In any case, the initial costs are so heavy, but our European experience has shown we have not had cost savings. But the operational people have been totally divested of the responsibility of accounting.
In our company, even people right at the top have no clue about the balance sheet. We have two sets of accounts, operational and legal. We have completely divorced the legal accounting from the operational accounting, and…the operational people who in the past were involved in the legal matters, are completely out of it. To me that is the biggest benefit. They just have to manage the business they are responsible for. How do you convert this into dollars and cents? You will find a big saving and this is how we justify the whole thing.
SC: What about getting senior management approval for these kinds of projects where you really need to outline tangible benefits? In our case, we try to reduce our cost base as a primary objective. Because of the prior experience we had with all the Mickey Mouse activities that go on with individual accounting systems, the management decided to standardize it.
JL: We engage independent consultants to verify the financial numbers to help us confirm and arrive at the final decision. We are doing the same with the financial services centre. I am pleased to hear that at Equant it came from the top down and cost was an issue, but not the overriding factor. It is better for top management to take leadership and ownership of the project as it is usually more effective.
RJ: In projects that I have seen, senior management commitment is very important. You invariably get an issue where the people in country are comfortable with the existing process and don’t want to give up control. There needs to be a clear corporate imperative, otherwise these projects are tough to manage through effectively.
JL: We are going to use SSCs on a regional basis and, given the disparity of wages in this region, it is important that the SSC must be cost-effective whilst maintaining high performance standards. The cost side of the equation on its own usually requires a longer financial payback. But then again, is it purely cost saving that drives any SSC? The other non-financial benefits must certainly have some influence on the decision as well. We are clear on what drives our strategy – to grow markets and use our assets in a responsible and productive manner.
JL: What sort of billing method do you use to motivate your operating companies to come into your service centre if the cost in Singapore is higher?
SC: Bottom line is what drives your tax strategy, withholding tax implications and offsets against withholding tax. With cross-border payments it can be a problem if you want to charge back the costs. In Equant, we don’t charge back the costs. We do it through transfer pricing.
AG: We have a meeting with management every three months. I prepared and sent out a letter beforehand. I said, this is not only a cost-savings exercise. You have to have an element of trust from top management.
JL: You are right. Tax is also one of our concerns. We understand that some companies that have SSCs go by revenue apportionment. If a region makes US$1bn, then the biggest contributor to that pays a proportionate fee to the service centre. But there could be issues in transfer pricing, which we would have to take into consideration in deciding the billing model.
JC: The main thing is standardization of processes and systems that are robust and scalable for all regions. This allows for data warehousing of worldwide information of all subsidiaries, promoting worldwide visibility. If you don’t have this, it is difficult for corporate control and decision-making. Scalability will allow for fast future growth of the business and that’s where the major savings will come in. That is how we are driving the SSC initiative.
AM: There are a lot of benefits from SSCs, but what are the drawbacks?
AG: The implementation is always an issue but the drawbacks are minimal.