SHARED SERVICES, PRIVATE HEADACHES
Setting up a shared service center can save a company millions in finance and administrative costs. It can also be one miserable experience for the CFO.
By Elizabeth Fry

As he talks on the phone from his office in Shanghai, one thing is clear: Sergio Garcia is not a huge fan of shared services.

He has his reasons. In 1994, as the financial controller for the Brazilian subsidiary of Allied Signal, Garcia watched as the US manufacturer tried to set up a shared service center in Sao Paulo. The move made sense. At the time, Allied Signal’s growing operations in Brazil had been divided among four regional facilities, each with its own finance and administrative operations. Different facilities meant different procedural standards. Moreover, work was often duplicated. Not surprisingly, the finance budget was getting out of hand.

A shared service center seemed like the answer. US multinationals such as Monsanto and American Express had being using shared service centers for years - with great success. A shared service center, where companies place far-flung finance and administrative operations under one roof, consolidates back-office functions into one seamless operation. Unlike mere centralization, a shared service center typically operates as a stand-alone business, treating individual business units as actual customers. In theory, such a center eliminates redundancies, standardizes processes, and creates economies of scale. In theory, these efficiencies save a company a bundle of money.

In theory. As Garcia fast discovered, the devil is in the shared service details. Despite the fact that the initiative had the full backing of senior management, it didn’t take long before things began unraveling in Sao Paulo. An accounts payable system that worked perfectly when run by individual operating units broke down when the processes were combined. "We neglected to map out existing financial processes, so we didn’t know if they were working properly," Garcia recalls. "So when we transferred these processes to the shared service center, the problems were magnified." Worse, Garcia says a lack of planning often led to idiotic - and disastrous - mistakes, such as giving vendors the wrong address. "We went from one day to the next, trying to figure things out as we went along," he says. "This was absolutely the wrong tactic." The situation became so frustrating that employees and customers simply walked away. Ultimately, Allied Signal’s management scrapped the whole shared service experiment in Brazil, pushing financial processes back to the individual business units.

Garcia’s experience in Sao Paulo should have finance managers in Asia worried. While many large US and European companies went the shared service route years ago, the idea is only now making its way to Asia. But given the region’s current economic woes, the shared service concept will likely find a receptive audience here. According to research by management consultancy Ernst & Young, a company can slash processing costs by as much as 40 percent by taking traditional support functions and turning them into process-based, customer-focused centers. At the very least, a shared service center should keep back-office costs from rising any higher. That’s bound to get the attention of cash-strapped corporate managers in Asia. And experts say there’s more to shared services than cost-cutting. David Greenwell, a shared service specialist who works in the Malaysia office of Ernst & Young, says: "Improved service levels, better information flow, and better decision-making by line managers are all part of the package."

So, too, are headaches. It’s estimated that more than 60 percent of shared service initiatives fail to fully deliver on their promises. What’s more, shared services isn’t for everyone. Consultants say small companies generally don’t have sizeable enough operations to merit a center, while mid-sized companies often don’t have the resources to pull off a proper implementation. Many CFOs believe a shared service center makes the most sense for large corporations that conduct common transactions in several countries, or one large country like China or India.

Even then, CFOs charged with setting up such a center would do well to stock up on plenty of aspirin. Garcia, who has been overseeing Allied Signal’s shared service initiative in Shanghai for the past two years, points out that the logistics of establishing a shared service center can be maddening. What’s more, managers at shared service centers in Asia often face a minefield of reporting and tax regulations - regulations which vary from country to country. Shared service centers also tend to generate a fireball of internal company squabbling. "A lot of people are hell-bent on protecting their turf," notes Robert Younghusband, shared services director for eye-care specialist Bausch & Lomb Asia. "That really does slow things down." Even consultants who trumpet the virtues of shared services sound a note of caution. Says Christine Gattenio of the Hackett Group, a US consulting and benchmarking firm, "The concept makes sense, but it’s no walk in the park."

Heels firmly dug in

Getting employees to buy into the concept of shared services may be the biggest hurdle CFOs face. This is particularly true in Asia. Observers point out that country managers in the region tend to have more autonomy than managers in other parts of the world, particularly at multinational corporations. Having carved out something of a fiefdom, these managers generally see shared services as an invasion of their territory. "The need to protect turf is very real and a definite stumbling block," notes Robert Paley, director of finance (Asia Pacific) at Monsanto.

You don’t have to tell that to Younghusband. Since Bausch & Lomb launched its Asia shared service center in Hong Kong in April, he says he’s been locked in an ugly battle of wills with local managers - many of whom are less than thrilled with the changes brought on by shared services. "Country managers resist every step of the way," Younghusband notes. "They just ignore instructions and hope we will go away."

It’s not likely Younghusband and his shared service team will go away. In 1997, Bausch & Lomb managers benchmarked the cost of the company’s global finance operations against 600 US multinationals. They were stunned by the results. The finance function was 4.2 percent of revenues. That number was more like 1.2 percent for the other 600 companies. Part of the problem was that Bausch & Lomb had finance services in 35 markets, each running its own systems and processes. That created tremendous inefficiencies. The company also discovered that finance staff were spending 60 percent of their time collecting data - not analyzing it.

Armed with those numbers, management decided to radically overhaul the company’s financial processes. Part of the overhauling: streamlining general accounting, supplier services, customer processes, and planning and analysis. The finance function was the first unit in the company to be moved to a shared service approach.

So far, the results have been impressive. Consolidating 27 finance processes into a shared service center wiped a tidy US$25 million from the company’s bottom line. That, in turn, has cut Bausch & Lomb’s finance function cost to roughly two percent of revenues - less than half what it was before. Younghusband says Bausch & Lomb’s Asian operations will likely account for about 15 percent of the company’s overall savings. The Hong Kong-based shared service center, he notes, is yielding other benefits as well. "People are getting more meaningful information faster," he says. "And finance staff have been divorced from transactions and freed up to support senior management." Still, Younghusband says he’s not receiving many thank-you cards from employees. "We have become a colossal pain in the neck," he admits. "But shared services has been mandated. It will happen."

Mind the mind-set

It’s already happened at Monsanto, a US$7.5 billion-in-sales producer of agricultural and life science products. In line with its global directive, the US-based company has created shared service centers for each of its operations in Asia. In addition to a center for the finance department, Monsanto has set up centers for human resources, logistics, and legal services, as well as some treasury functions.

Surprisingly, finance chief Paley says the company has pretty much overcome the turf wars touched off by the shared service roll-out. The secret, he says, was marrying shared services to employee bonuses, which is exactly what Monsanto did when the company adopted Economic Value Added (EVA) in 1995. Company managers use EVA - a financial metric which focuses on cost of capital - to measure corporate performance and to push employees to meet individual targets. These targets are then linked to bigger-picture goals, such as an increase in overall company EVA. Paley does point out, however, that a shared service center is generally a business cost rather than a revenue generator. Thus, he says the EVA targets for workers at Monsanto’s financial shared service centers differ from those of other employees. The performance of an accounts payable clerk, for instance, is based on world-class benchmarks - and not on the creation of positive EVA. This kind of custom-fitting seems to be working, too. Paley says Monsanto’s shared service centers have helped cut operating costs by 25 to 30 percent. "It’s amazing what you can achieve when compensation plans are tied to common strategic objectives," he says.

This doesn’t mean Paley hasn’t run into some serious snags along the way. Cost allocation - what the shared service centers charge company users - remains a thorny issue. "Line managers complain that the services cost too much, but that’s the fault of the finance function," explains Paley. "It doesn’t do an effective job of explaining what businesses are getting for their money." To better define the value of their work, managers at the company’s Asia centers actually issued contracts for their services during the early stages of the roll-out. But Paley says the company eventually abandoned the policy. "We went through the laborious task of negotiating individual contracts. We decided they were a waste of time."

In truth, some CFOs believe contracts are a sure sign that all is not well in shared service land. According to Ian Swanson, vice president of finance (Asia Pacific) at the Seagram Company, a $9.7 billion-in-sales global beverages and entertainment company: "If you need contracts when you’re up and running, it’s not working. You simply cannot have developed the necessary teamwork or the service orientation." Before setting up a shared service center, consultants say company managers need to take a long hard look at the culture of the company. Mostly, managers need to make sure workers appreciate the importance of corporate goals. Otherwise, getting employees to pull together will be like pulling teeth. "If you’re spending time debating who pays for what service, then you really haven’t changed the corporate culture," Swanson points out. "And you won’t get the benefits." Although the Seagram’s shared service center has captured most of the company’s greater China payments cycle, Swanson says he’s been careful not to take on too much until he is satisfied service in the region won’t suffer. "Doing too much, too rapidly, increases the chance of failing," he says. "You need time to build up expertise in servicing markets."

Customer care

Meanwhile, Sergio Garcia has only recently emerged from shared service hell. Not long after the fiasco in Brazil, Allied Signal put him in charge of setting up another center in Shanghai. Company managers reckoned his experience in Brazil had made him acutely aware of the pitfalls of setting up such a center. But Garcia says the shared service rollout in Shanghai, which began in 1996, presented him with a whole new set of distinctly Chinese problems. Chinese vendors wanted cash - not exactly how a multinational company operates. What’s more, he had real trouble keeping finance employees in place. One of his top workers lasted all of six weeks in the shared service center before leaving. Garcia says the worker was fed up with the lack of customer contact and felt alienated from the company. Nevertheless, Garcia believes Allied Signal can actually turn the shared service operation in Shanghai into a money-making proposition. While he says the center is not yet running at peak efficiency, he figures the 700 employees at the Shanghai facility are conducting enough transactions to help the facility break even next year. Past that, he believes the shared service center can become a profit center.

Indeed, while corporate managers at many companies in the region see shared services as a cost-cutter, a few trendsetters see it as a revenue generator. In the eight months since its inception, Hong Kong Telecom’s shared service telephone call center has rung up 45 external clients, most of whom are financial services providers. A handful of other large multinational corporations, including US heavyweight GE Capital, are apparently marketing their back-office operations to external corporate customers. Given the difficulties in setting up shared service centers, there could be a market for shared service providers. Surprisingly, Garcia proclaims: "I want to be the payroll king for all of Asia. I want to make money going after companies that want to do shared services but don’t want the hassle of doing it themselves."

It won’t be an easy sell. Even Garcia admits that managers at smaller local companies may not see the point in a shared service arrangement. "They will probably view it as a cost, not an investment," he says. Attracting good customers to such a center could prove to be ticklish. Experts say corporate finance managers should make dead sure that a shared service center is properly serving internal customers before it is marketed to external ones. "You only get one crack at external customers," says Bausch & Lomb’s Younghusband. "Moving them to a shared service center too soon could be risky." Garcia says that, at the very least, finance staff members working at a center should be kept far far away from potential customers. "You will be dead," he warns, "if you give the marketing job to a finance guy."

Elizabeth Fry, a contributor at CFO Asia, writes frequently about finance and corporate reengineering.