While many of our readers are far advanced on their shared services journey, many people find our site when the search for ‘what are shared services?’ or ‘what is a shared service center?’
A definition for shared services
Shared service centers are where typically 'back office' functions (like Accounts Payable (AP) Accounts Receivable (AR) or IT) are centralized. Instead of having an AP department in every state or country you operate in, companies may have a regional or global Accounts Payable shared services center. Accounts payable is typically one of the first functions moved to shared services as is a high volume transactional process which is relatively easy to automate.
Shared services have four key characteristics, they are centralized, they promote automation, they standardize processes and they act like a business within a business. They are often set up to reduce the cost of the back-office function, and they generally evolve to also produce higher value work – including analytics and business intelligence. Advanced shared services are more like a partner to the business than just a service provider.
The 4 characteristics in detail
1. Centralization - Finance Shared Services is not the same as Centralized Finance. Centralization is a feature of shared services, not a definition. Shared services became mainstream in the early 2000s. They started mainly when finance, mainly accounts payable moved to centralize. So instead of having an AP team in say, New York, San Francisco, and Chicago, you move to once Finance Shared Services center, in say Minneapolis. Centralization is not only more efficient, it helps companies capitalize on economies of scale.
2. Automation – Shared services need to deliver savings, and the main way to do that is to automate. Particularly when they have the increased scale from centralizing finance functions, there is great value from deploying AP automation. This means they deploy technologies – e-invoicing, workflow, reconciliation tools, robotics, supplier portals, dynamic discounting, e-catalogues, P cards.
3. Process Standardization: Standardizing and improving processes is a goal for all shared services. Once centralized, SSCs focus on the next tier of savings and next step forward in process improvement all the time. They continuously improve. Most SSOs have a rolling 5% cost reduction target in place, post-centralization. They are always on their toes, ready to deliver the next cost-saving or process improvement program.
4. Runs like a business within a business: Shared services have customers. The business units they support are often referred to as ‘customers’. Moving from a transaction culture to a service culture is a significant undertaking for a shared services. Not only do they need a culture of customer service, they also need to prove their worth. Shared services often charge business units for services rendered. They need to show that they are not only providing a high-quality service, but that they are cost effective, compared to say, outsourcing.
From an organizational perspective, there are a number of factors which determine whether something is just centralized finance or indeed an SSO.
Leadership – does the CEO/Director/General Manager of the SSO have entrepreneurial skills required to start up a business or is the leader an accountant or Finance Director. Having commercial, accounting and IT skills means you might make the perfect SSO Leader, and chances are you’re heading a true SSO because of the commercial qualities you are brining to the table.
Service level agreements – when as a customer you buy a service, you typically sign up to a service based on a proposal and contract. Equally, if an SSO has a comprehensive SLA (this does not mean it has to be long) then it means it’s more likely moving away from an accounting centre and becoming an SSO. If there are penalty clauses enforceable by this SLA, then this suggests that the SSO is confident in its service delivery.
Attention to customer service – how customer oriented is the SSO? Does it really live or die by the service offered, like any other business, or is there still a peer-to-peer mentality in service delivery. If a not-my-problem attitude plays out, which can often exist in a typical back office department, then the SSO’s progression towards a market place model will be stunted. A significant shift to a service attitude has to exist in order to be a true SSO, and certainly to attain a market place status.
Charging – Referring back to what an SSO is not – it’s not a centralized finance function. It should be, and is, in its true form, a business, not a charity. It provides services which have value associated with them, and this value transpires largely because of the commercial pillars of Timeliness (ie efficiency) and Quality (ie effectiveness). The value derived here justifies a fee, and in fact deserves a fee. A true SSO recognizes it is a business, it has costs, and it needs to cover them and ideally make a profit. So the commercial argument supports charging, but so does the value argument – we only really value what we pay for in this life. Finally, if charging is per-transaction, an SSO can start influencing behavior by financially rewarding the good and penalizing the non-compliant. This single technique where, for example a PO invoice is charged at €4.00 and a non PO invoice is charged at €12.00, can enforce good behaviour and have hugely positive ramifications on the finance function, and the company’s overall profit.
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