Earlier this week I had a fascinating conversation with a shared services director of a very successful and high performing SSO. We were talking about running a commercial operation and what it meant. In his view, he ran a commercial SSO. “So how do you charge?” I asked. And the answer was “we don’t”. “Urmm…” I thought, “surely this doesn’t make you ‘commercial’?”
In the life cycle of shared services, the concept of charging in many people’s minds has the significance of charging your phone battery before you go to bed at night. You often forget about it, but it’s essential to performance. I’ve worked with tons of shared services operations over the years, and can tell almost immediately, without asking, how they structure their charging mechanism. I will give you an example.
In 2006 I worked really closely with a pan-European shared services organisation that was set up by an FMCG which specialised in confectionary and body products. The SSO had around 30 projects on the go and the CEO had stated that she wanted to see hundreds of millions in savings over a five-year period. She wanted everyone focusing on this goal.
The champion of change at the SSO was tasked with realising this goal. He was a ‘shoot from the hip’ kind of guy and didn’t seem too phased by the idea that whilst traversing the chasm between bad processes and future process excellence, he may lose a few friends and ruffle a few feathers. He understood that change in results was about change in behaviour, and that users across the business needed to be rewarded for ‘good’ actions and punished for ‘bad’. Sounds drastic? Sounds patronising? Sounds Draconian? However it may sound, the results started to emerge that promised the CEO’s vision would manifest.
So what did he do that was so effective? One simple change was around charging. When they had allowed their SSO to settle and stabilise, they introduced e-invoicing. They looked at their volume of PO invoices and non PO invoices, and looked at which business units, and countries were a) sending high volumes of PO invoices and b) converting paper to electronic according to target, and decided these customers warranted different treatment to the non-compliant users and laggards in the company. The champion for change and his team decided on activity-based charging, or itemised charging based on the transaction type.
The principle was simple. There were four tariffs:
1/ The first was for paper non-PO invoices – clearly the most expensive to process. Having communicated to senior management the cost to the business of processing such a transaction, and the ramifications of such a transaction to aspects of financial management like cash flow forecasting, the champion of change was blessed to charge offenders of such transactions an inflated fee of €50 to €80 per invoice.
2/ The second was for electronic non-PO invoices. Wonderful! The business unit had supported the SSO’s drive for moving to electronic, but the savings realised through eliminating the paper were nullified by the costs incurred through treating the transaction as an exception because the PO was missing. Therefore the tariff charged to the business unit decreased slightly, to say ‘well done and thanks’ for the electronic invoice, but ‘try harder’ for the PO next time. The charge per invoice came in at €15 or so.
3/ The third was for paper PO invoices. These transactions could be deemed as cheaper to process than the electronic non POs because, although they were manual, they matched first time. However, in the case of this company, they wanted to convert 80% of invoices to electronic, so paper was still considered an anathema. How could you urge the business units to support your electronic aims? Continue to charge high. So the charge for this type of transaction came in at the same level as an electronic Non PO – around €15 or so.
4/ And now for the golden transaction – the electronic PO invoice. To drive change, and motivate users, and change behaviour the SSO had two options. To process this kind of transaction for free, or charge a nominal fee to cover the cost of the electronic invoice only. In the case of this company they charged around €1.00
So you can begin to see the developments that emerge from a billing structure like this. People are typically bad at changing behaviour, especially if there is zero consequence of continuing with bad habits. The two most effective ways of eliminating bad habits is penalising the perpetrator for ‘bad behaviour’ and dangling the carrot, the prize which will be won once he has mended his ways and complied with the process rules.
Companies are deeply complicated and house thousands of people that have their own priority lists which make up their day-time job. Often raising orders in the correct way fails to have a presence on that list. To force a low-profile item on to the list, you need to make it high-profile, and attaching cash to an item, or action, can often serve as an excellent way to increase the importance of an exercise like raising a PO on to the list. And before you know it, it’s become habit!
Human beings love reward and loathe punishment. The champion of change I worked with knew this and introduced two other components to drive continuous improvement:
1/ Country CFOs were bonused on electronic invoice conversion for their territory.
2/ A league table was published every month to list the business units PO and non PO, electronic and paper transactions, and what their average cost per invoice was. This was shared with senior management, who were clearly very interested in the numbers, and who followed up with the Bus accordingly.
It may sound very parent-child, but sometimes this type of relationship needs to come into play when resistance to certain practices are taking place and preventing the greater good from transpiring. Some people at the FMCG became quite upset by this new charging approach, but you can tell what happened, can’t you? Yes – PO compliancy soared and their electronic penetration targets were on track to enable the CEO to meet her cost saving objectives. It may sound like an administrative headache to monitor and track, but the companies that practice this type of charging and see their efforts bear fruit think the investment of time is worth every minute.
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