Utilization of shared services is becoming increasingly tied to corporate strategy, and centers are handling more work than ever before.

by Peggy Cope

Shared services have been doing a very good job for a lot of companies. And you know what happens when you do work well? You get more of it.

“What’s happening in shared services, once people get past digging their heels in, they get embedded control, handle more data than before, and consolidate and improve processes. They have a whole lot more capability as far as providing useful data and information than they ever had in the past,” said Penny Weller, senior business advisor at The Hackett Group (pictured above, left).

Weller’s in a position to know. She worked in decision support in shared services at Pfizer, and when she started pushing the shared-services model 12 years ago, the resistance was fierce. As every business unit fought for its own people and systems, it was nearly impossible to pull them apart. According to Weller, the time hadn’t come yet for Pfizer, although now the pharmaceutical giant’s executives find they are willing to defend the possibilities of shared services’ benefits.

As elsewhere, Sarbanes-Oxley has had a huge impact on shared services when it comes to finance and accounting. Once they get past internal complaints and see the true value of not having all that business “stuff” to deal with, finance people see the light and even realize the benefits of having better data. Said Weller, “It’s a struggle, but they are seeing the true value.”

Hackett’s research has demonstrated that shared services is one of the foundational tools used by finance organizations to drive performance. By utilizing shared services, 65 percent of world-class firms save 20 percent or more, and nearly a third achieve savings upwards of 41 percent. And compared with peer companies that are operating at a lower-than-world-class level, these organizations are tapping shared services at staggering levels: 92.9 percent in accounts payable, 89.7 percent in travel & expenses, 90 percent in credit, 73.5 percent in tax management, and 95 percent in technology portfolio. Those figures correspond to peer-company utilization of shared services at 67.4 percent, 63.8 percent, 28 percent, 58.4 percent, and 71.2 percent in the same categories, respectively.

Down the road, shared services are expected to take an even larger role. And the roles it is playing go well beyond the transactional, said Weller.
According to Michael Steer, managing consultant at PA Consulting , “It’s not just about getting a cheaper cost; executives are saying, ‘I want to know what goes into that cost.’ Transaction pricing isn’t the way to go any more.”

PA Consulting has a simple method to help clients understand what they are being charged. The fact that it’s being done by a third party doesn’t mean a company should be satisfied with merely knowing what it is being charged per invoice. “You don’t really know what you are paying for,” said Steer.
He confirmed that there is movement toward shared services doing higher-level functions, much in the same way that third-party outsourcing has climbed up the value chain. Indeed, many of the big names in outsourcing have a heritage around SSCs and captives operating in the same space. “If you are going captive, this is what you need to do,” said Steer. “You have to move up the value chain. Some of it is still transactional stuff, but more of it is becoming the ‘sexy’ analysis type of stuff.”

As outsourcing and shared services tread parallel paths, said Steer, there is less differentiation between them, especially with a hybrid model, which is emerging in his view. In shared services, decision support staff, finance management, and centers of expertise already exist, as do tax functions.
One area of potential evolution is particularly intriguing to Steer: co-opetition among client organizations. “Why do organizations continue to grow their own SSCs when they can have a SSC that services the whole industry?” he asked. In financial services, every bank had its own check-clearing facility, but that’s gone to third-party providers. He predicts there will be a move toward alliances in that space, with companies crossing boundaries and asking why every company has its own SSC when they can share a single center.

Of course, in a compliance-centric era, this raises the issue of trust, especially around data security. Steer, however, believes all that can be handled by segmenting what each company is willing to share and retaining control over key customers and suppliers that will never go into a shared-services center.
In the future, the use of shared services is only expected to grow. Hackett research reports that centers that employ more than 1,000 people are forecast to double in size. And medium-sized centers will expand to become large ones. In addition, the talent in the average SSC for world-class companies gets paid more and tends to have more certifications than employees of peer companies. Weller commented that at Pfizer, when she brought in people who had degrees in accounts payable, people thought she was “nuts.” Those days are waning fast.

The Philips Story
Perhaps the best-known story of shared services and outsourcing in today’s marketplace is last year’s mega-deal between Philips and Infosys.
Jim Schweizer, general manager of shared business services at Philips North America, said that his company’s three main areas of business (healthcare, consumer lifestyle, and lighting) are supported by six shared-services tracks covering finance, purchasing, applications, infrastructure, real estate, and HR.
The company’s partner in shared services as of last year is Infosys (for more detail on the Infosys deal, see cover story in the September/October 2007 issue of FAO Today).

The Philips mission says it is a business focusing on customer needs and delivering excellent quality and sense and simplicity in financial services at competitive prices to all Philips businesses. The company said that transferring its SSCs to Infosys keeps that mission moving forward.
“Philips’ strategy was to take the ability to move activities to a low-cost country with some focus on process improvement. Doing so gave us savings from arbitrage and fund process improvements,” said Schweizer. He noted that 80 to 90 percent of the migration work for its SSCs that are moving to Infosys is done. The transition is comparatively painless, as the SSCs already existed and the bulk of the staff remained intact, as do mature processes.

For Philips, the evolution through captive SSCs to third-party outsourcing was a factor of its corporate identity. “Every company has to do what fits its culture,” he said. “With our presence around the world, we could use the people we had in those countries to develop a captive model.” The company had enough staff, with more than 500 people in Poland and 500 in India, to capture savings. More importantly, it gave them internal buy-in. The Philips culture would not let them immediately go out to a partner. “We showed them we could do the shared-services thing, then, with buy-in, take the next step,” he added.

In 2007 Philips determined it had reached the part of the journey where it needed to take that next logical step, to work on automation and standardization. Career opportunities, development, and retention were also an issue for the staff in the company’s captives.

Philips transitioned 1,400 jobs to three centers starting in Bangkok in 2002, with limited scope. After that proved successful, it built the business case for the Europe SSC, which started in 2003 in Poland. In North America, Schweizer joined the shared services group in early 2004 and began the migration to Chennai in the middle of that year.

“It’s been the most exciting job I’ve had in finance, moving out of one business environment and seeing the entire Philips structure and culture,” he said. “Seeing the effects of process improvement is really where it’s at.”

The benefits of shared services were numerous. The SSCs enabled Philips to reduce the number of accounting systems—more than 200 legacy systems. “Although we were an SAP house, we let each division do its own thing,” he said. Now, they are all on SAP and down to a dozen instances. The goal is to get to one instance for healthcare, one for lighting, one for consumer lifestyle. “That may be the best we can ever get to in Philips, but it’s better than 229,” he joked.

In addition, the centers fostered harmonization of process. A Philips team developed a process charter, determining what work should be in the SSC, what should be handled on-site, and what could be nearshored. Another major goal was standardization. Standard desktop procedures were implemented for each business line. The organization’s level of compliance with standard working instructions reached 85 percent at the end of 2007, compared with less than 40 percent in 2004.

Six months into the journey from captive to outsourced SSCs, Philips has achieved key transition milestones, and service levels are stable. It is developing a corporate identity program for a new Shared Business Services Finance organization and has established a governance model with a common set of key performance indicators, service level agreements, and other ways to work in a harmonized way across all regions.

Service delivery hubs have been established in North America, which will align with the SSC. A new division will provide one face to the customer, Philips North America. “We are providing that service, no matter whether it’s done here or in the SSC,” said Schweizer.

Now, Philips is ready to work with Infosys to implement new tool sets to improve current processes. Transaction-based pricing will be implemented in 2009 as the company tries to streamline and standardize how different areas do things.

For Philips, the intention is to use the SSC model as a tool to change behavior. The organization will continue to leverage global process owners within its finance excellence network to continuously improve processes on an end-to-end basis, while exploring shared-service options in other areas. The beat goes on.