Leveraging a Shared Service Centre for Greater Payments Efficiency
Today, it seems that wherever you look companies are intently focused on cost efficiency and how to strategically reduce spend across their operations. As a result, the shared service centre (SSC) model has received considerable attention as companies seek to gain further efficiencies and reduce costs by outsourcing non-core functions, such as accounts payable (AP) and human resources (HR). The decision to establish a SSC can be a simple decision for any company to make: do we really need to operate different regional departments for a non-core function when it can be centralised and outsourced to a low-cost environment?
The introduction of the Sarbanes-Oxley (SOX) Act, particularly in the US, and its enhanced controls around financial processes initially pushed companies in the direction of enforcing stringent documentation of all processes within their financial operations. For many companies, the next wave of SOX implementation is considering how they can improve the efficiency of these processes. For example, if businesses can centralise financial processes, then there is a better chance of streamlining them and enforcing uniform practices across the organisation (in compliance with SOX), which has renewed the focus on SSCs.
As stated, two key functions within a company’s finance department that are most suited for outsourcing are AP and HR. When considering which functions to migrate to an SSC, AP tends to be given a higher priority than other functions such as accounts receivable (AR). With its paper-based, labour-intensive processes for invoice receipt and approval, AP has quickly emerged as an ideal candidate for this type of environment.
Once companies have decided what functions to outsource, what action should they take towards establishing a SSC? The first vital step is ensuring that the applicable processes are already streamlined and functioning efficiently. For example, AP affects core elements of the company’s supply chain and, therefore, has a significant impact on cash management and treasury. Despite this importance, AP is often the last place that companies deploy new technology or implement a process control view. In most cases, AP departments have grown organically with key staff simply retaining important information in their heads, for instance, without the existence of formal policies. If a company wants to move the AP function to a low-cost environment, it needs to make sure it is a well-organised process in the first place.
This is one of the most common mistakes companies make when it comes to SSCs and we have seen cases where organisations have tried to implement technology at the same time as capturing knowledge and outsourcing the function. If inefficient operations are outsourced then the whole project is likely to fail, so it is crucial that companies conduct some form of strategic analysis before they take the decision to establish a SSC.
The AP function relates to a broad process that includes tasks such as receiving invoices, processing, matching under purchase orders and coding. These processes need just as much attention within the SSC environment as the payment itself. This is especially critical if a company is trying to establish a regional or global SSC because without due diligence relative to the processes around the payment, it can encounter challenges around the payment format, banking relationships and in-country regulations.
That isn’t to say that all of the challenges only exist upstream of the payments process. When it comes to payment standards and formats, companies shouldn’t necessarily rely on a ‘one-stop shop’ approach. Payment standards are not uniform so they cannot be used in all cases, especially given the types of payments and transactions that are processed in SSCs. (SSCs tend to deal with high-volume, low-value transactions, which is where there is the most variability when it comes to payment processing systems and standards.) SWIFT’s progress has been hugely beneficial, but the standards that banks use with their corporate clients are predominately for high-value, low-volume type transactions.
Standards are evolving but they are a long way from being bulletproof and, as a result, companies need to have a strategy in place that allows them to process payments centrally but execute them on a regional or global basis. Since this aspect of cash flow converges with treasury, the SSC must be able to provide treasury with adequate visibility into and control over the company’s cash. To meet this requirement, SSC environments are increasingly seeking solutions that enable them to consolidate various payment systems into a single platform, or ‘payments factory’. Such an approach not only centralises control and enhances visibility, but also provides the access regionally dispersed finance professionals and remote offices require.
Another advantage of the payments factory approach is when companies want to consolidate everything into one central ERP or general ledger (GL) system during the transition to a SSC. In reality, it is very rare to be able to create a single GL and, therefore, the SSC will inherit multiple GLs that it must manage. If we look at the payments factory concept, from a cash visibility and control perspective, companies could leverage this approach to introduce a gateway across multiple ERP systems to different banks, but still have a single location through which they can control cash disbursement without having to maintain a separate payment system and bank connection infrastructure for each ERP system.
The adoption of a SSC model can also prove to be an ideal time to consolidate banking relationships. This doesn’t necessarily mean reducing bank relationships to just one or two as you might lose some leverage and functionality on a regional basis. It’s about reducing relationships as a means to consolidate account structures to a more manageable level.
And finally, with so many companies sourcing goods from overseas, cross-border trade is rising rapidly, providing companies with yet another component to factor into their SSC strategy. This is not just in terms of cultural and language challenges but also determining the most efficient way to process AP invoices that are received from suppliers around the world and to initiate a payment. For example, if an invoice is submitted from a supplier in Singapore, it is important that the SSC understands the most cost-effective payment method to pay those vendors. It is advisable to think more widely about how you can streamline and globalise the payment process as well as the payment type. By leveraging a payments factory with the full breadth of domestic and international payment capabilities, SSCs can ensure they possess the ability to use the most cost-effective payment type each time.
When a company decides to outsource a function, such as AP, there are numerous factors to take into account. The real value of the SSC model is in streamlining and automating processes providing visibility into payments from a spend management perspective. Implementing a SSC model for payments should start with a strategic analysis of the processes already in place and then expand to identifying the payments platforms and approaches capable of helping business achieve their strategic objectives; only then will companies be able to drive the efficiencies they seek through the SSC model.