Cash & Liquidity ManagementCash ManagementAccounts PayableSSC: Benefits and Best Practice

SSC: Benefits and Best Practice

While shared service centres (SSCs) have been around for some time, the concept has not been static and many have just seen the tip of the iceberg in terms of possibilities.

Indeed, the scope of these projects has steadily broadened to include a greater range of business processes, while attitudes towards issues such as location have also evolved. Technological advances, alongside regulatory pressures, have multiplied the benefits available – especially with respect to financial processes. The nature of these accounting and treasury functions, as well as the onerous burden of control and compliance that accompanies them, means they lend themselves well to centralisation and consolidation. And this has driven the separate development of the payment factory model.

A payments factory can be a function within an SSC or exist as a separate entity in its own right. The concepts are essentially very similar: grouping together back office processes in order to derive efficiencies and cost savings through economies of scale. While an SSC could include functions as diverse as HR and accounting, payments factories generally deal only with payments processing – though this is increasingly being broadened to include collections, reconciliation and the settlement of intra-group transactions. And in both cases achieving economies of scale will present a virtuous circle for corporates.

At their core, SSCs and payment factories are about the consolidation of processes across and between regions, so the goal of any SSC initiative should be to simplify and automate as many of these processes as possible. While cost savings through the elimination of duplicate processes were originally seen as the core driver of these projects, the benefits realised have broadened to include an improved working capital and liquidity position through making the best possible use of internal funds and reducing external borrowing, as well as strengthened control and compliance.

Indeed, recent regulatory developments have made the SSC model more appealing in a range of ways. More stringent measures, primarily in the US and Europe, have led to compliance becoming more demanding, and legislation, such as the Sarbanes-Oxley Act, have established much more stringent control practices. Centralising functions within an SSC or a payments factory allows for consistent controls to be applied, as well as increasing the visibility of processes and providing a standardised source for measuring corporate metrics.

Yet not all SSCs have been universally successful. Ensuring best practice in establishing an SSC or a payments factory entails a thorough analysis of the underlying issues involved. Failure to effectively understand and redesign processes before consolidation can simply result in existing inefficiencies being amplified. And while centralisation is a key theme here, we should not lose sight of the requirements for delivering high quality services to the rest of the business. Another pitfall is underestimating the planning and effort involved in overcoming embedded cultures in previously separate parts of an organisation. Managing this transition and leveraging those linkages that have previously not been fully recognised will present a burdensome task for many corporates. Over-consolidation is also a danger: key areas of specialisation should be recognised and preserved within any new structure.

The Role of Banks

With financial processes playing such a key part of SSC initiatives, and technological capability being so crucial to the success of these projects, the role of banking partners is gaining in importance. It is likely that SSCs and payment factories will be responsible for functions across countries that contain disparate payment and clearing systems. In this respect – and in order to simplify, centralise and automate as many processes as possible – the choice of a transaction bank that has the global coverage and necessary IT infrastructure will be crucial.

Of particular importance will be a bank’s ability to offer access across a range of markets in order to allow corporates to benefit from the full range of transaction banking services available. For example, corporates should consider a bank that offers a range of connectivity options, including proprietary, standard host-to-host, as well as corporate access to the SWIFT payments network. Yet the greatest benefit comes when these solutions are fully integrated. This allows for the maximum level of straight-through processing, as well as offering back-up systems for contingency purposes.

However, while IT capability is undoubtedly key, the ability to manage and process paper transactions will also be crucial. Though most large multinationals will have dematerialised wherever possible, their trading partners may still be reliant on paper-based process to a greater extent.

Regional Drivers

Aside from the broadening scope of the SSC concept, opinion as to the optimum location for these centres is also changing. While in the early days of the concept multinational corporates often located their SSCs in high-cost OECD countries such as the UK or the US, the perceived potential for cost savings meant the trend then shifted to offshoring, with the Indian sub-continent being a popular location. Recent developments have seen many corporates take a new approach to siting these centres: ‘nearshoring’. This generally involves setting up in regions such as Central and Eastern Europe, where costs are low but education levels and skills are high, and cultural and language barriers are less pronounced. Indeed, establishing SSCs in these countries often comes with the benefit of being close to existing manufacturing plants, or even offers the possibility of siting these facilities together.

However, other Asian countries still remain extremely popular for regional SSCs. Locations with high levels of English proficiency – such as Singapore and Manila – may not offer the lowest cost base but do have the necessary infrastructure and skilled workforce to support pooled financial service centres. And establishing these operations in Asia also allows corporates to nurture new talent from the region’s rapidly growing economies.

While some corporates have experimented with global SSCs, the regional model is still favoured by most. Language and time zone issues have been the decisive factor in this respect, while those that have gone down the global route have often chosen to have several SSCs split by function, reducing the number of business areas concentrated in each one.

Ongoing Development

Even given the recent developments in SSC best practice and the multiplication of the benefits available, we are still at the tip of the iceberg in terms of SSC activity. There remains great potential for the expansion of the range of business processes covered, as well as the number of corporates that can potentially benefit. Indeed, while SSCs were once the preserve of multinationals, many smaller enterprises are now in a position to benefit from those techniques pioneered by larger corporates.

Further enhancement of the SSC value-proposition has also come from the recent implementation of the single euro payments area (SEPA) in Europe. By reducing the myriad of payment instruments across the eurozone and the UK, the economies of scale potentially available from payments factories has increased accordingly. And this has also accelerated the development of ‘in-house banks’ and ‘payment on behalf of structures’. By using a group account for all subsidiaries, a multinational corporation is able to consolidate liquidity positions between these subsidiaries and also reduce costs through streamlining banking relationships. Hence, the closer links between corporate treasuries and payment factories/SSCs more than ever before.

Overall, the trend towards increased centralisation, standardisation and automation will continue for some time and as long as corporates are aware of the potential pitfalls and difficulties involved, the SSC model should continue to grow both in scope and popularity. Technological advances as well as regulatory change (e.g. SEPA) are driving this adoption. Therefore, the choice of banking partner that can follow these trends and continue to invest in the solutions for the future becomes even more important.

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