Internal shared services and outsourcing can co-exist peacefully and profitably, if you know how to do it.

by Christian Baader, Gianni Giacomelli

Automation of tasks and pooling of task volumes by centralizing services can enable cost reduction, better risk management, and improved service quality. Evidence shows that in principle the unit costs of many G&A functions, including F&A, decrease in lockstep with the size of the respective organization. The graph below illustrates this result from a study performed by the SAP User Group including both SAP- and non-SAP-based F&A organizations in the U.S.
       
However, besides the fact that not all processes benefit equally strongly from economies of scale, the outliers and the significant spread in the graph above also suggest that automation and scale alone are not sufficient for reaping all of the possible benefits. A closer look reveals that service centralization can only show its effects fully if processes are suitably harmonized and standardized.

Standardization of processes and/or technology impacts all drivers of value for the customer, regardless of whether he is a customer of his own internal shared service center or of an external outsourcing services provider. First of all, the more processes are standardized, the easier it is to decrease the F&A process cost per employee; i.e., benefit from the economy of scale advantage of service centralization.

Secondly, process optimization is vastly facilitated by standardization. Without it, the adoption and continuous improvement of best FAO practices will be complex and expensive.

And thirdly, with standardization the benefits of labor arbitrage can be more easily achieved, as this will help make distributed delivery including offshore operations more viable, from the perspective of process and people, as well as from an economic point of view.

Those embarking on the F&A transformation journey should obviously think of standardization as the rule, and use customization as an exception. However, standardization is neither possible nor advisable (e.g.. some processes do not “scale,” i.e. they behave more like a pure “variable cost”) in all cases, and processes that are out-of-scope may inadvertently nullify the benefits of the transformed ones.

So, which processes can or should be standardized—and thus can be centralized well? This decision follows a similar logic to the one about process-retention in-house or outsourcing. These scope choices need to be driven by process economics, like reducing F&A staff/revenue ratios, which tend to vary depending on the specific business process. Each business process, for instance Accounts Payable or Treasury, has its own characteristics in terms of what ratio can be achieved (i.e., “how efficient can you ideally be”) and how fast it can get there (i.e., “how big your company typically must be to reap those economies of scale”).

It is crucial for each company considering the move to answer two questions: First, “Where am I today in terms of scale and efficiency?” and secondly “Where can I get to with the help of potential BPO providers or internal shared services experts?” in order to identify the potential gains.

In general, the larger the organization and the more transactional the processes are, the bigger the benefits from running the services in a centralized “one-to-many” environment will be. In addition, some processes lend themselves better to optimization and reengineering, while for others the potential gain is somewhat limited. To effectively prioritize the approach, it is important to take stock of how much of the cost structure is represented by the (sub)process and thus how big the standardization gain can be in absolute terms; in other words, start with the big meaty chunks.

So, if you want to transform your business along these lines, how should your approach look to determine where standardization may help either internal or external F&A service delivery? The following five steps will help to frame the relevant thoughts and questions:

Step 1: In a Value Creation Analysis you should first compare the current performance and the achievable future state. This must be done for each (sub)process, in each country. As an example: how much better a performance can you achieve in your Fixed Assets Accounting process in France if you leverage scale, process optimization and labor arbitrage to the maximum? What additional benefits and cost would be achievable via outsourcing compared to internal service centralization?

Step 2: Create a scorecard for assessment of net (i.e., “gain” minus “pain”) value creation through (sub)process standardization. To illustrate with an example: If you standardize dunning for Canada to be deployed in an internal SSC, what is the qualitative and quantitative gain and what is the disruption due to standardization?

Step 3: Summarize the results for each (sub)process and for both internal and external service centralization.

Step 4: Compare sub-processes by plotting the results in a graph that depicts both models as well as the potential gain and pain (see graph below:).

In the graph you can see that process 1 delivers insufficient gains when deployed internally, while for process 3 both options are viable (but BPO delivers more gain). Process 4 is an example of a process where harmonization and standardization are simply too painful and this should remain a decentralized process.

Step 5: Do a reality check: does the portfolio of processes that you have identified as candidates for transformation lend itself to be segregated seamlessly from the rest of the organization; i.e., does it still constitute an integral part while being severed? This is where a whole business process and technology mapping must happen, and it must be thorough, as the devils as well as the hidden gems are often in the details. To achieve the desired sustainability, the technology foundation itself needs to be robust, scalable and viable for the long term, and it should be flexible enough to allow a further shifting of the balance between internal and external service delivery in the future.

This approach will help you to assess the impact of F&A-transformation via in-house Shared Service Centers or external BPO providers. It supports informed decision making by keeping all the relevant factors in sight.

The time is right to bring engineering rigor, discipline and a holistic view into the decision-making about service centralization.

Christian Baader is vice president BPO, SAP. Gianni Giacomelli is head of BPO Global Strategy and Marketing, SAP.