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Business case for India Domestic Shared Services – a Myth?


Business case for India Domestic Shared Services – a Myth?

In the corridors of corporate headquarters of many Indian Companies, it is often heard that “we are not focused on cost saves for Shared Services, rather we are focused on value”, or, “we believe that the decentralized Business Units will not be comfortable with this strategy since this will impact their empowerment” or even “we know that many leaders devote bulk of their time on transactional activities fighting fires every day, but we want them to be working with business leaders to enable decision support”.

Quite often, such conversations tend to take people away from the focus on creating a business case to validate the real saves, post implementation. In real life, we have seen more strategic actions on Business Process Management happening when the business case is clear. This is true, even if it is a negative business case financially, but the non-financial benefits can be spelt out and agreed by the decision makers.business-case-india-domestic-shared-services-myth-1

Need for Business Case

A Business Case provides the description and reason for starting any strategic initiative. This is a basic discipline for any organization, even if the primary driver for considering an initiative is not cost saves. An assessment is required into the reasons for making the organization invest resources and management bandwidth into a venture that may or may not end in a commensurate result. In the case of BPM, questions such as state of the current process (or our concerns with it), visibility of the proposed process, its financial impact and benefits should be asked and well understood beforehand.

The first of its kind survey by RvaluE in 2012, confirms a significant finding that the India Shared Service Centers (SSC) have achieved cost saves!business-case-india-domestic-shared-services-myth-2

69% of the respondents said they were able to obtain cost savings of at least 10 %, of which 38% said that saves were more than 20%.

Hence, this is not hearsay. Leaders have achieved this! This empirical research dispels the notion that SSCs catering to customers in India do not have positive cost benefits, as the wage arbitrage equations are not available.

Having said this, it seems that there are still many sceptics for whom even this empirical research is neither sufficient nor acceptable – may be, more as a psychological issue than a real one. The issue does not seem to be one of belief, but of acceptance!

Research has indisputably shown that humans are irrational and can act in irrational ways in many situations. Take the example of travel. Travel on a commercial airline is a lot safer than travelling by train or even by on-road driving. Dr. Arnold Barnett, of the Massachusetts Institute of Technology, has done extensive research in the field of commercial flight safety. He found that the death risk per flight was one in seven million as compared to a train journey, where the odds are one in a million. That makes flying around seven times safer than train. Yet we would happily believe that train journey is the safer mode of transport.

Based on human behavioural experience, one can easily say “what is not logical need not be illogical, but it is certainly psychological”.

Our intent here is to logically share how the value proposition is established, what are the components of business case preparation and how the business case is achieved to reconfirm that the business case is really real, and not a myth.

Establishing the Value Proposition

To establish the value proposition for Shared Services, companies derive a solid Business Case in India context by their focus on FIVE key drivers: Right Strategic Orientation, Right Scale, Right Understanding of Current Costs, Right Organization Design, and Right Business Services Model.

1.  Right Strategic Orientation for Support & Service Functions:

By design, business cases for SSCs are established for a period of about five years – never for just one or two years, as is applicable for other business investments. Hence, it is best to see the distinction between ‘shaping’ the strategy and implementation. While the investments will happen mostly in the year of implementation or flow in to the next year, the implementation and benefits have to be considered over 5 years, to establish the business case in terms of cost saves, cash pay back, and IRR.

As is usual for all initiatives, the Implementation is often a phased activity with a few waves of transition. Therefore, the business case has to be seen overall, for a set of waves and not for just the first wave or every wave, one by one.

The best approach, therefore, for the strategic orientation is to make Shared Services as part of an overall Business Process Consolidation (BPC) effort, preferably covering processes under multiple support functions like F&A, HR and SCM, or at least two functions, thereby establishing the scale for immediate and future potential.

These functional processes are so tightly linked, that even if the waves of implementation are spaced over a period, when implemented, they truly become business processes by breaking the silos of functions to interconnected business processes, like splitting P2P (Purchase to Pay) into P2I (Purchase to Invoice) and I2P (Invoice to Pay) connects SCM with F&A. Similarly splitting O2C (Order to Cash) into O2I (Order to Invoice) and I2C (Invoice to Cash) connects Sales & Distribution with F&A. This also supports the upstream/ downstream alignment of process to achieve process effectiveness.

Those companies that build the strategic intent and road map of SSC/ BPC as an Initiative for three to five years have always achieved a better business case, than those who have visibility for just one year.

2.  Right Scale:

All efforts of BPM, especially if they are in the nature of Shared Services (whether in-house or outsourced) are scale dependent. Many of these changes are fundamental in nature requiring substantial one-time investments – largely in the area of technology and infrastructure. Covering small groups of processes and/ or team sizes may not bring in any substantial benefits.

The survey carried out in the year 2012 by RvaluE within the Indian SSC organizations shows that over 70% of the respondents had team sizes of 100 people or more.

The SSCs were just set up a year ago and were in the process of ramping up. Quite often, Shared Services evolves as a ‘functional strategy’ for one function, and hence, the scale is a derivative of this approach. In such a case, it is important to assess the opportunity for all processes; for example, to get scale it is better to consider overall F&A verses a part of F&A (like AP/Payroll in F&A). The strategy map or BPC blueprint should be created accordingly.

The scale will decide the investments and infrastructure. If the scale is too low, it may not yield the desired power of Shared Services but could become more like a ‘centralized department’, defeating the very purpose. Reasonable scale will enable investments and infrastructure to be created for a larger capacity for utilization over two years. This then connects to the strategic orientation.

3.  Right Understanding of Costs

The way costs of production, operations or sales are established is very different from the way the costs of service functions are looked at. Service function costs are usually considered overheads – collated and allocated to various Business Units. Hence, rarely is there any idea of what it costs to run an operation like Shared Services for any staff or support function, until one initiates this strategy.  This is true whether it is captive or outsourced.

Salary costs are a major cost, but there are many other costs that surface more like independent ‘ledger accounts’. There may not even be a consolidated view. It is important to understand the full cost elements including technology costs, infrastructure costs, and even costs of not having a tool like ‘workflow’ to build metrics into the transactional activities of the staff functions. ‘Costs of poor quality’ is never even in sight with the current way of cost collation and budgetary control.

Many respondents in the 2012 Survey have indicated that their teams are spending a significant amount of time on transactional activities compared to time spent on risk management or decision support – an issue that SSCs address very effectively. Quite often, the staff functions act as a department, without being able to measure their output and their benefit/ impact on the organization i.e they do not measure their contribution, as a ‘line function’.

These elements effectively come to life when any organization is looking at Captive Shared Services strategy, but more so, if outsourcing is considered an option. In the costing parlance, this is more specifically called as Fully Loaded Cost (FLC). The focus on business case and its preparation leads to getting a better insight into costs of staff functions vis-a-vis the current way of cost capture and work towards optimizing for business effectiveness.

Business Units leaders will always be delighted to get an unbeatable combination of cost saves without interfering with their sense of empowerment.

4.  Right Organization Design:

The need for Org redesign is like sharp edge of a sword – most impactful and at the same time most sensitive!

When transactional activities of staff functions are distributed across locations, the staffing is also distributed. Most often each of the multiple locations are carrying out similar activities. Also, the staff at various locations carry out activities with varying degrees of complexity. This leads to hiring to meet the highest complexity – even if the hired person needs to devote only a fraction of his time on that activity. These may lead to situations of high costs and runs the risk of creating a person-dependent environment as opposed to a process oriented workflow.

The business case focus brings to surface this real need for Shared Services, with the best possible sensitivity to address the softer dimensions of people.

5.  Right Business Services Model:

business-case-india-domestic-shared-services-myth-3Shaping the Business Services model, in directional alignment with strategic objectives and goals, is one of the major steps for successful redesigning of service functions. The BPC strategy for each organization depends upon the strategic direction of the organization, its growth plans, the current business priorities and how the various staff/ support functions enable the business units and the organization to achieve their key goals. It also depends on the scale of the consolidation possible and time horizon the company can look into at that point of time.

There are many types of Business Services Models: Captive Shared Services, Outsourced Shared Services, Hybrid (of Captive & Outsourced), and Managed Services. The choice will depend upon, inter alia, the following key considerations:

The Managed Services model could become a good alternative to Captive Shared Services since it brings in specialized BPM Capabilities of a Service Partner, while the ownership and control rests with the company, quite like a captive. This is a blended model where the infrastructure is provided by the company with a mix of permanent/ contractual resourcing, while leadership, service accountability, and management is provided by an external Service Partner.

 

The Components of Business Case

There are FOUR Major components to the Business Case Preparation: Investments, Current State Costs, Future State Costs, and Cash flow/ Cost of Capital.

While planning for Shared Service setup, Initial Investments should consider:

  • Infrastructure & Technology Costs (Site Fit Out Cost/ IT Infrastructure/ Desktop/ Laptops/ Workflow/DMS Software Cost)
  • People Related Costs (Recruitment Cost/ Dual Cost/ Redeployment Cost/ Re-skilling Cost)
  • Project Execution Costs (Project Management/ Transition and Preparation for SSC (To-Be Design)/ Process Documentation and Training Materials/ Other Project Costs like Travel)

Dual Costs are quite unique to these kinds of Initiatives where restructuring is called for to make the Shared Services effective. These are overlapping costs, mostly of people who are hired before redeployment. For a particular period of time, there are likely to be additional people in the system to support the transition.

The Current State and Future State costs will depend upon the size of consolidation planned now, and over a period of time – to build the business case for a period of five years, keeping in view the initial investments and the capacity being created.

The Cash Flow cost and discounting is similar to any other business case. As usual, this Business Case too needs to establish saves, payback and NPV/IRR.

A Business Case refresh post every milestone implementation is an integral part of the preparation to ensure that saves expected are realized and the variance, if any, explained. For this purpose, it is essential to keep the assumptions clear, so that they are validated at the time of refresh.

How the Business Case becomes Real

The consolidation to Shared Service will result in restructuring of people, process, technology, and customer focus. It will simultaneously enable controls and business orientation.

A Positive Business Case comes through:

  • Consolidation Effect,
  • Right Fit,
  • Right Level Mix,
  • Right Span of Control,
  • Process & Metrics Orientation,
  • Automation,
  • Increased production through up-skilling

Fundamentally, in the India Domestic environment, built on all the FIVE drivers of value proposition as above, the business case for Consolidation comes out from:

  • structural and skill arbitrage with the right span/ right level/ right skill mix  in the short term; and
  • shift in orientation of people, leaders and customers – from only functional to process, metrics, service, customer, and business – to sustain the benefits in the medium term.

Quite often there may be a need to add some entry level resourcing to supplement new support activities that are critical to the success of consolidation (like Mail Room Operations). Typically, organization redesign (including spans and layers) needs to happen within a year of setting up operations, and functional trimming, if any, should be done through normal attrition or through a plan of redeployment – to ensure business case plans are converted into real saves.

With the consolidation of processes, opportunity exists for headcount optimization of 5% to 8% over a period of 3 to 5 years and this effect trickles in on to the retained headcount also, say in the range of 2% to 5%.

Reengineering processes could yield further an average of 10% 25% in cost saves after reinvestment. Besides the real Business Case benefits, the non-financial benefits that drive value could well be as under:

 

 

 

 

 

Operational

  • Speed – Reduced cycle times (Payments/ Authorizations/ Billing), and Faster Completion (Financial Closing/ Performance Management)
  • Quality – Better customer service, Reduced error rates (Quality at source), and Enable Controls
  • Productivity – Higher Output, Lower delivery costs, Reduced expenses/ systems infrastructure costs, Improved information for decision making

Strategic

  • Achieve process and systems standardization
  • Process Value Chain
  • Support Merger & Acquisitions
  • Support growth

Beyond all these benefits and value from better process performance and management, SSCs that are true to their purpose are also seen as facilitators for cultural change, implementation of organization-wide transformational initiatives, and better financial management.

Creating such centres can be a daunting task for the project and process managers entrusted to them.

The ghosts they may have to encounter could well be mythical – internal resistance and non believers. However, the demonstrated success of several such institutions within the country is enough evidence to prove that the story is real and achievable!

 

 

 

 

 

 

 

 

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