The notion of shared services is no longer simply a concept or philosophy, it is a proven approach that streamlines processes, reduces costs and improves service quality. As described by sharedserviceslink.com, a community for finance leaders in this field, “shared services is the brighter, more attractive and better performing sibling to centralisation”. The question is, if a company is pursuing an offshore shared service centre, how does it find the location that is the best fit?
Taking on the transactional and process-driven elements of the back office and some customer-facing functions, activity among new and maturing shared service organisations has continued despite the economic slowdown. Indeed as Elias Van Herwaarden, Europe, Middle East and Africa service leader, global location and facility services at Deloitte, a professional services firm, says: “A CFO that doesn’t accept shared services as a concept should be looking for another job.”
US dominates in investment
Between January 2010 and August 2011, data from fDi Markets shows that globally there were 104 investment projects for shared services from 86 companies. The US accounted for 53% of the outward investment projects, followed by the UK (8%) and Switzerland (7%). Norwegian energy company Statoil and FirstBank in the US were the leading companies in job creation terms, undertaking offshore shared service projects that each created 3000 jobs.
Most recently, however, Mr Van Herwaarden has noticed a shift in focus. “Most of our work immediately after the crisis was for new captives, relocations or modifications to the scope of shared services. Then, at the start of this year, we had a couple of companies looking to do a radical overhaul of their shared services. Now we’re receiving these calls once a week.”
Balancing cost and quality
Regardless of whether it is a mature centre wanting to move to the next level or an organisation just getting started, identifying the right location requires a qualitative and quantitative assessment. Douglas Clark, director at Location Connections, a specialist advisor in this field, stresses that the underlying business case for shared services must be clear from the outset. “You need to relate these objectives to key location factors to balance cost and quality,” he says.
Common criteria for assessment include:
- Workforce volume and education, and the availability of talent, skills and languages.
- A supportive local development agency (LDA) and incentives (although, as Mr Van Herwaarden says, incentives should be the icing on the cake).
- The cost of buildings, wages and training.
- The availability of buildings, high-speed internet and transport.
- The presence of other shared service centres and outsourcers.
- The local regulatory and tax environment.
- Economic and political stability.
DSM’s city search
When global materials and life sciences company DSM wanted to establish shared service centres for its major regions, it started with a list of 49 location criteria. In addition it had city-specific measures to compare local inflation, the intricacies of the local labour market, travel time from DSM hubs and the local development agency.
DSM weighted the factors according to its shared service objectives. To get an accurate assessment, John Hall, senior vice-president at DSM Business Support, asked process-improvement consultancy Hackett to identify the best countries and cities.
“We were most interested in the workforce, so our cost weighting was about 30% of the total, which we knew was low,” says Mr Hall. Hackett adjusted the weighting of a number of the criteria to see how it would impact the results.
Hackett presented DSM with a shortlist of five cities. “This is when it went from scientific to artistic,” says Mr Hall. He took people from DSM’s local human resources, finance and facilities functions on site visits as they would understand the local culture and work ethic.
“We’d meet with the development agency, government and education authorities, visit other shared service centres and outsourcers, and even look at housing stock. The LDA was very important. A couple of agencies didn’t respond to us, so we took the cities off our shortlist.”
Each member of the team scored one, three, seven or nine (to avoid fence sitting), compared notes and agreed on a team number. The final results were a surprise. “The best in the world, by a long way, was Albuquerque in New Mexico,” he says. “The LDA was fantastic. It had high-quality space at good prices, its internet bandwidth was amazing, it had a very good education system and there was little threat of flood or hurricane. While the total cost wasn’t dissimilar to India, the challenge was disbelief. People just didn’t believe it.”
Having assessed its options, DSM is building two office centres supporting six front offices. A greenfield site in Hyderabad, India, is due to open soon. Mr Hall says that it was selected, among other reasons, for the support the Andrah Pradesh state gives to business and education. The second shared service centre will be on a brownfield site in Nanjing, China.
Places to watch
Mr Clark and Mr Van Herwaarden also share their thoughts on countries to look out for. “Eastern Poland is a current favourite of mine,” says Mr Clark. “It has lower costs than the west, huge pools of talent and a developing infrastructure.”
Mr Van Herwaarden flags Romania and says he never ceases to be impressed by how it has mastered the core European and Slavic languages. He also recommends considering Egypt once peace returns.
With so much to bear in mind when faced with a location decision, Mr Van Herwaarden shares his key location dos and don’ts:
|Chase incentives||Brief senior management at milestones|
|Assume all local development agencies are equal||Conduct internal stakeholder analysis|
|Underestimate the LDAs||Mobilise relevant expertise|
|Assume you understand people because they speak English||Localise the specifications|
|Assume it is OK if it is documented||Maintain confidentiality|
|Rely on statistics||Conduct detailed field investigations|
|Underestimate permitting issues||Go out and see for yourself|
|Opt for easy answers||Build in time for overseas analysis|
|Rush||Stay abreast of parallel tracks|
The final piece of advice from Mr Hall is not to attempt this alone: “We worked with Hackett but it could easily have been one of six or so organisations with large databases and contacts. Don’t try to do this yourself, but also don’t let them do it for you.”