Corporate TreasuryCentralisationCentralisation OutsourcingThe Rise of Shared Services

The Rise of Shared Services

Shared services involve the sharing of tools, technology, processes, knowledge and skills to gain cost and process efficiencies from economies of scale, standardisation and best practices. The treasury function of organisations within both the banking and corporate sector is a prime example of a shared service function (even if, for many years, it was not classified as such).

Although the concept of shared services is not a new one, it is enjoying a new lease of life, as a result of market up-turn and acceleration towards globalisation, both of business and process. With the increasing number of sourcing options available and the improvement in technology and communications, it is becoming ever clearer that a centralised shared services model can provide many bottom line benefits.

Globalisation

More organisations are looking at shared services on a global scale. In the past, each global region, or even individual country, was considered independent from a shared services perspective – this is no longer the case. Continuing pressures to obtain more extensive cost savings from middle and back-office operations are driving companies to look for greater economies of scale from shared services, while improvements in technology have made it feasible for global business units to perform shared services functions centrally. The impact of globalisation on shared services can be clearly observed in the investment banking sector. While banks have traditionally organised their treasury functions along regional lines, acceleration towards globalisation is driving them to re-structure their treasury activities around centralised functions, capable of serving business units worldwide.

Off-shoring SSCs

The drive towards lowering costs (as well as improved communications) has meant that shared service centres (SSCs) are increasingly being relocated from domestic sites to cheaper, offshore locations such as India. While this trend is nothing new, resources in India will become scarcer and more costly and, as a result, China looks set to become the favoured destination of the future. It is also highly possible that, particularly for Western European firms, countries such as Hungary, the Czech Republic and Russia, will become popular locations, thanks to a combination of language skills, high levels of education and relatively low wage costs.

Despite the enthusiasm for off-shoring, businesses are still experiencing difficulties with it. These obstacles range from dealing with time-zone differences to coping with linguistic problems and service quality issues. Companies often make matters worse by failing to prepare adequately before moving work offshore. As a result, considerable flux is created as firms, disappointed by the quality of service achieved by offshore centres, bring processes back in house. Not surprisingly, a large number of companies still have significant concerns about transferring business processes to offshore centres.

Driving Forces

Traditionally, SSCs have handled low value activities, easily suited to automation. In the past, processes transferred to shared services models have tended to be simple, routine ones, most commonly drawn from HR, marketing, finance or IT functions. Generally highly repetitive, these processes require a minimum of customer interaction. Within the finance function, for example, typical activities handled by SSCs might include accounts payable, accounts receivable, and so on. Entire service centres – often referred to as ‘payment factories’ – have been set up to carry out such activities on a massive scale. A typical example of this type of payment factory is Barclaycard’s cheque processing centres. Nevertheless, while the traditional SSC (with its emphasis on ‘factory-like’ processing) continues to flourish, firms are looking to transfer more complex processes to shared services models. Improved automation, more sophisticated software, best practice process frameworks, as well as standardised business processes and Internet technologies are all making such moves possible.

Companies that have traditionally made relatively limited use of shared services models, such as investment banks, are now taking a greater interest in doing so. Unlike retail banks, which have mature and static models, and have therefore had an interest in developing SSCs for a considerable period of time, investment banks have been slow to adopt shared services. The delay is unsurprising – the investment banking environment is extremely dynamic (sub-second delays can result in millions of pounds in lost revenues) and the sector has been subject to much merger and acquisition (M&A) activity. That said, investment banks are now really waking up to the use of shared services.

In addition, progress has also been hindered by major outsourcing companies, which have failed to provide adequate packaged shared service models (with standard best practice processes, tools and roles) that banks and other financial institutions can move to. As packages have to date been poor, with neither enough preparation invested in them by outsourcers or the banks themselves, attempts to transfer work to outsourced SSCs have only met with patchy success, regardless of the claims of third party shared service organisations.

Better Re-organisation of Business Processes

A number of firms are gradually realising that in order to derive real, lasting value from SSCs, business processes must be standardised and re-organised before they are moved out to lower cost, centralised units. However, companies still often fail to understand that in order for an SSC to succeed (particularly one handling sophisticated processes), a replicable process for the sharing of skills and knowledge is necessary. Procedures must be in place to quantify, measure, and record the information to be transferred – correct documentation, capturing and transitioning of knowledge is essential. And, in the financial world, where a strong focus on ‘siloed’ skill sets exists, such a need to share and ‘genericise’ skill sets requires a considerable shift in attitude and culture.

In particular, organisations have not understood the need to develop shared service models in two essential areas. Firstly, processes must be accurately defined, individuals assigned specific responsibilities, and measurements taken across key transition points. Secondly, supporting tools should be driven by process and best practices. Firms must also consider their technical architecture – service orientation provides a mechanism to align technology with both the process and operating models, in turn this allows the removal of redundant systems, thus optimising shared services.

In terms of human capital, realignment of people and teams around an agreed transition plan is essential, as is the need to stabilise change once it has occurred. An adequate knowledge base, as well as the documentation to underpin shared service functions and processes, is a basic requirement. Staff should be trained sufficiently to ensure that service quality measures up well against pre-defined service level agreements.

It is important to note that, where processes are appropriately re-organised, the greatest cost-savings and efficiency gains can be made. Indeed, experience and research indicates that while geographical re-location to a cheaper cost centre can yield potential cost savings of 10% to 20%, re-engineering of processes enables firms to achieve benefits by up to 60%.

Rationalisation of Technological Infrastructure

For firms (from the finance and non-finance sectors) with highly complex technological infrastructures, shared services also represents an excellent means of reducing IT complexity. For banks and financial institutions in particular, the need to disentangle the mish-mash of IT systems is becoming particularly necessary. Firms often have in place several hundred loosely integrated software systems that are very costly to maintain. For firms desperate to reduce IT maintenance costs through the centralisation of services, decommissioning of redundant technology and the cutting of support and development overheads, shared services models offer a real ray of hope.

Future Potential

In the future, it is likely that we will witness a growth in the number of multiple function SSCs, particularly as the net benefits of designing and implementing a multi-function shared services organisation are greater than the sum of more decentralised efforts, due both to lower total and up front costs and a more consistent approach to internal customers. However, on the negative side, multi-function SSCs are more difficult to implement, the complexity increasing as a greater number of functions are included. Firms also face the following dilemmas:

  • What functions should be included?
  • How fast should the implementation progress?
  • What information is needed regarding workload and costs?
  • How should internal customers be engaged?

Needless to say, these issues are all complex and defy ‘one-size-fits-all’ answers. Furthermore, the change management issues associated with multi-function SSCs are challenging, to say the least.

Looking even further into the future, it is also possible to envisage ‘on-demand’, location-independent SSCs. Taking inspiration from technology, service oriented architectures (SOA) could provide a viable model for distributing shared services across multiple SSCs, at the process level. This, in turn, would enable organisations to pick and choose SSC providers to optimise costs and processes on demand. Simple tasks could initially be distributed across interoperable SSCs and once the model was proven, even more complex processes could become subject to real-time rate cards issued by internal and external SSCs, vying for business.

Whitepapers & Resources

Transaction Banking Survey 2019

Transaction Banking Survey 2019

1y
TIS Sanction Screening Survey Report

Payments TIS Sanction Screening Survey Report

1y
Enhancing your strategic position: Digitalization in Treasury

Payments Enhancing your strategic position: Digitalization in Treasury

1y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

2y