The Future for Shared Service Centres
Payment factories and shared service centres (SSCs) are not a new phenomenon. But as more corporates seek to centralise their treasury operations, these processing centres are under the spotlight like never before.
The benefits of payment factories and SSCs have been hotly debated in recent times, and industry surveys show a continued commitment by corporate treasurers to greater centralisation of transaction processing using this type of facility. A number of factors are set to accelerate this trend. First, the single euro payments area (SEPA), which took a major step forward earlier this year with the launch of the SEPA credit transfer (SCT), is a key driver of centralisation. By standardising payment processes across Europe, SEPA will enable even larger economies of scale, which is likely to fuel further growth in payment factories and SSCs.
Second, in response to regulatory pressures and legislation, such as Basel II and Sarbanes-Oxley and its equivalents in countries and regions around the world, organisations are urgently addressing the need for rigorous and consistent transaction processing and information management. Against such a backdrop, centralised processing is preferable to local processing of transactions in numerous locations worldwide. Indeed, for many companies, risk management has become a more important driver of payment factories and SSCs than the potential cost savings.
Third, now that the SSC model is tried and tested, SMEs are trying to gain some of the efficiencies that large multinationals have achieved. In addition, new technologies are making the SSC model more accessible to SMEs, with web-based platforms enabling them to centralise payables receivables with less cost and complexity.
These are among the factors behind the popularity of payment factories and SSCs. It is worth making a distinction between the two models – they are, in effect, different points on the evolutionary path of treasury centralisation. Typically, a company starts out with decentralised treasury operations, before moving to a centralised treasury model. Payment factories represent the next step: they provide centralised payments processing, including the netting of positions between subsidiaries. They enable improvements in liquidity management, greater control over payment methods (and hence cycle times) and reduced banking relationships and vendors, with a view to enhancing working capital.
An SSC is the next and final step on the journey. It is the holy grail of treasury centralisation, incorporating all the centralised payables services found in a payment factory, with the addition of related services, such as payroll processing, FX and interest rate management, and centralised treasury activities including raising finance, deploying surplus cash and managing banking partnerships.
Inevitably, the more value that SSCs deliver, the more that is expected of them. Senior management is increasingly watching payment factories and SSCs closely, with many organisations having to report regularly to the chief financial officer or even chief executive on the performance of these operations. The constant focus on maintaining a competitive edge and maximising shareholder returns drives treasury to explore how these facilities can take on additional services less relevant to treasury management – though vital to the organisation as a whole – such as HR, client service, marketing and IT. Where previously SSCs focused solely on transaction processing, they are becoming a strategic engine room for the wider organisation, increasingly delivering value-added services. So, as well as the potential for growth in SSCs, there is significant scope for increasing the range of processes they handle.
The strategic importance of payment factories and SSCs raises the stakes – they are under the spotlight and need to be successful from the word go. Their performance should not, however, be judged on cost savings alone. Indeed, these facilities are not quick wins; the tangible benefits will come, but organisations should not underestimate the investment required to get them up and running. Here are some tips for ensuring a successful set-up:
One of the most important decisions when establishing a payment factory or SSC is location. Finding the right place requires thought and planning – success is about more than just accessing the right skills cheaply in a low-cost country. Apart from the financial incentives on offer in some locations, organisations should consider factors such as time zone, cultural and local infrastructure barriers, the quality of local resources and communications, and government policy.
Initially, payment factories and SSCs were established in high-cost countries such as the US, UK, Netherlands, Hong Kong and Singapore, and subsequently in tax-efficient locations such as Dublin and Belgium. With the same tax incentives no longer on offer, and a newly enlarged Europe to play with, the choice of location has widened and facilities have sprung up in ‘near-sourcing’ centres such as Glasgow, Liverpool, Maastricht, Barcelona, Slovakia and Romania. Further a field, popular offshoring destinations include Asia, South Africa and, in particular, the Indian subcontinent. Locating a facility away from the organisation’s existing headquarters can help it establish its own identity and promote the value it brings to the organisation.
A single global payment factory or SSC would appear to be the ideal scenario for corporate treasurers. However, with a handful of exceptions, most companies prefer regional hubs – a structure that lends itself to the ‘follow-the-sun’ approach, where processing queues move from one time zone to the next, ensuring 24-hour coverage and visibility.
So, you have your payment factory or SSC in place – how is it likely to evolve in the coming years? As noted above, the introduction of SEPA will continue to promote the centralisation of transaction processing. The inevitable consolidation of bank accounts and relationships as a result of SEPA will further accelerate the use of payment factories and SSCs for transaction and reconciliation processes.
In particular, the launch of the SEPA direct debit (SDD) in November 2009 will help address an outstanding challenge for payment factories – the centralisation of receivables – by providing a standardised method of cross-border funds collection throughout the SEPA region. Currently, most set-ups are split between accounts payable and accounts receivable functions. But regional initiatives such as the SDD makes a convergent set-up for both streams more feasible, further increasing the harmonisation of processes and the potential for cutting costs.
More aggressive centralisation of receivables will also result in improved data about customers and allow better management of disputes. Improved understanding of debtor behaviour could lead to better structuring of debt repayment and have a positive impact on cash flows.
More widespread adoption of XML-based messaging standards also has the potential to transform the capabilities of payment factories. XML will eventually allow companies to realise a vision of common connectivity, security and format, with the cycle from e-invoicing to payment to reconciliation automation using a common set of message standards. The potential power of payment factories and SSCs will increase as XML will ease their ability to interface with different systems and applications. Further progress on XML standardisation will depend, however, on industry agreement and discussion.
In addition, the increase in convertible currencies as a result of regulatory changes in countries, such as Russia, Croatia, Uzbekistan and Kazakhstan, means more payments can be brought into centralised structures, making for improved efficiency and control.
Meanwhile, banks are working increasingly closely with third party software suppliers to integrate value-added services, such as e-invoicing, invoice imaging and workflow, netting and cash flow forecasting solutions, enabling more processes to be migrated into payment factories and SSCs.
SSCs could also play a key role in trade operations. Around 85% of trade is now done on open account, and most significant trade finance providers are working with corporates to centralise their supply chain financing processes. The result could be that country-driven practices are replaced by regional or global practices, which in turn could lead corporates to migrate their trade processes to SSCs.
Without a doubt, the increasing requirement for control and for improved information management is driving a major trend towards centralisation of transaction processing through payment factories and SSCs. And, as these facilities evolve to incorporate a range of advanced services, they are becoming strategic hubs on which organisations are relying ever more heavily.