Financial Automation

What are Financial Shared Services?

Since the mid-80s, Ford, Whirlpool, Intel, General Electric, and many other large corporations have been successfully using shared service centers as a way to cut costs and optimize internal operations. Simply by standardizing, consolidating, and reengineering their back-office operations, these organizations gained a competitive edge that continues to the present day. Today, something like 80% of the Fortune 500 use financial shared service centers, and by layering on standardization, finance automation, and AI, they are taking shared services to the next level of efficiency and cost savings. 

What are Financial Shared Services?

Under the shared services center (SSC) model, low-value, back-office operations are consolidated in a central location and sold back to the rest of the organization. This removes the redundancies of running A/P, payroll, human resources, and purchasing in each separate business unit or country. 

This is not to be confused with centralization, which can impose another level of bureaucracy  and inhibit innovation. Rather, a financial shared services center serves as an independent service provider within an organization. As independent service providers, SSCs are funded by user fees according to contractual agreements with the other business units in their organizations.

What is Included in Shared Services?

The kinds of tasks best suited for SSCs are those that are similar across different business units and which are not critical to overall company strategy. Traditionally, SSCs have been employed to handle data entry-heavy tasks such as managing accounts payable, accounts receivable, general ledger, and other low-value transactional services. As the diagram below from Deloitte’s excellent Shared Services Handbook shows, some parts of an end-to-end process, such as procure-to-pay, may be initiated by a local business unit, then passed back and forth between the SSC and the local business unit: 

However, thanks to robotic process automation, AI, and cloud computing, SSCs are increasingly taking on entire end-to-end processes, as well as expanding beyond transactional tasks to provide higher level support services. This gives the finance teams of the various business units the bandwidth to focus more on strategic work such as FP&A, budgeting, and data analytics. 

What is a Shared Services Operating Model?

What I find fascinating is the tremendous variety in the operating models used by different shared services organizations and how these emphasize an entrepreneurial approach. Some use a captive model, where a dedicated SSC provides specific services. At the other end of the spectrum is a full outsourcing model, where a business process outsourcer is used. Many organizations use a hybrid approach, and use an SSC for some business processes, and an outsourcing provider for other processes. 

Some organizations first build out an SSC, then automate those processes, or outsource them to other service providers. SSCs may be located offshore in low-cost locations such as India or Romania, or operate in high-wage countries like the U.S. The business processes themselves may range from low-value transaction processing to higher value services such as budgeting or data analysis. 

Because the demand for services may fluctuate from month to month, and because the needs of the stakeholders may change over time, developing an effective governance model is essential. These define how the finance shared service center, the finance teams of the business units, and the head office work together so that all are focused on the same overall strategic goals. Effective governance models include accountability measures for all parties, and allow for the arrangement to evolve over time. 

Contractual agreements called service level agreements (SLAs) are typically a key element of governance models. These specify the scope of the services to be provided, the price, and generally also specify expected metrics of time and quality. 

Governance models may also include global process owners (GPO). A GPO takes responsibility for an entire end-to-end process for an organization. Assigning one person to oversee a process makes it possible to optimize that process, and ensure that all choices made with regard to that process are aligned with the overall goals and strategy of the organization. They serve as the point person for improving the integration of that particular process with all business units. 

Why do Shared Services Fail?

Poor planning The biggest reason why SSC initiatives fail is insufficient planning. Developing a new SSC or expanding the scope of an existing SSC is a huge and disruptive change that will be felt throughout the entire organization. At the very least, the design needs to specify in granular detail who will do what, where they will do it, and how they will do it. 

Inadequate resources The people assigned to plan and lead a new SSC can’t be expected to take on this project in addition to their usual responsibilities. Temporary staffing replacements may be needed. Stakeholders in the different business units who will be interfacing with the SSC must be included in the planning process to ensure that their concerns are addressed. 

Lack of benchmarking An essential part of planning is understanding the current status quo. Failing to benchmark current operations in terms of performance, headcount, and cost will make it impossible to measure the efficiencies gained by consolidating processes. As the SSC is implemented and as it evolves, a focus on continuous improvement in metrics will ensure its long-term viability. However, cost reduction must be balanced against the quality of service provided to the business units.    

Resistance to change Another big reason that shared services fail is not dealing with the resistance to change. Because jobs will be cut or may change, human resources needs to take an active role throughout planning and implementation. For a finance shared service initiative, getting the support of financial controllers and CFOs at all the business units is key. They may not be willing to relinquish control, and they will need support to navigate any changes to their roles. 

Poor communication Overcommunication is impossible, but under communication is deadly. Adding a help desk to answer questions and to ensure synergies are in line and that all concerns are being met can help allay many of the fears people will have about change. Communication must continue for the life of the SSC to ensure that it is still meeting the needs of the business units as both sides evolve. 

What are the Pros and Cons of Shared Services? 

The biggest benefit of shared services, obviously, is the cost savings by reducing redundancies in back office operations. According to Deloitte’s 2019 survey of shared services, 45% of respondents achieved at least a 10% reduction in headcount. Over half of the organizations reported cost savings of at least 15% from increased productivity. While planning and implementing a new SSC is costly, 80% had payback within 3 years, and 50% reached break even within 2 years. 

Organizations also get a boost from improved operational efficiencies because all business units need to follow the same financial processes to interface successfully with the SSC. Improvements in transaction processing mean better and more timely data for decision making. And, as mentioned above, building an SSC can serve as a stepping stone to increased use of robotic process automation and AI. 

However, for global companies, SSCs can be a compliance headache. Countries have different versions of GAAP, and can have vastly different laws, regulations, tax structures, and currencies. It can be a challenge to work across time zones, countries, and languages. 

Technology may not be compatible between different business units, which may then necessitate costly upgrades to get everyone on the same platform. Changing to a shared services model can potentially impact half or more of employees and how they do their jobs, so extensive retraining may be required. And, if a major disaster strikes in the area where the SSC is located, this can paralyze the  entire organization.  

What is the Future of Shared Services?

For many organizations, the future of shared services is here. According to Deloitte’s 2019 survey on shared services, “SSC organizations are and will increasingly become more global, complex, and digital, as they seek to provide nimble and efficient services, stronger customer service, and high-impact business outcomes.” They are rapidly shifting from simply processing orders and transactions to creating value with higher level business services. 

Advances in technology such as cloud computing, 5G networks, and single-instance ERPs will make it possible for organizations to establish SSCs where the talent is. Plus, the talent in these regions is becoming increasingly sophisticated, thanks to local government support for training.

With cloud ERPs, building a new SSC no longer requires investing in an expensive data center and infrastructure. It also makes it possible to develop virtual SSCs, which means talent can be from anywhere in the world. 

Advances in AI and RPA mean that more tasks can be done by machines alone. A recent report by the World Economic Forum projects that by 2025, machines and humans will be working equal hours across all occupations. For SSCs, this means that headcount — and therefore costs — will continue to decrease. 

What excites me about the convergence of all these changes is the increasing ability for accountants to be strategic and to drive innovation across their organizations rather than limiting themselves to transactional accounting. Implementing an SSC means all the pieces of an organization have to be on the same page with processes and systems. Adding more automation at the SSC level improves accuracy and efficiency. All of that means CFOs and, really, anyone affiliated with the financial function, will have better numbers faster and easier. Who can say no to that?

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Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.