Financial Shared Services


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Challenges and payoffs in using shared services

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Financial Shared Services

  1. 1. OUTSOURCING INSIGHTS W H I T E PA P E R Cha llenges and Payoffs in using Shared Service Centers for Financia l Transa ction Processi ng For more information, please contact Ramesh Krish at 917-971-9701
  2. 2. Executive Summary There has been an increased focus on outsourcing over the last few years. As companies try to show improved bottom lines with little top line growth, cost cutting while optimizing operations by outsourcing functions has become very prevalent. However the complexity around outsourcing decisions is increasing, with the advent of new service providers, financial terms and operating models. In addition, the probability of failure due to insufficient upfront analysis is increasing. The Adya Team helps organizations find answers to questions about outsourcing that match their unique requirements: Is outsourcing appropriate for me? What functions, processes or departments do I outsource and what potential benefits (cost effectiveness, improved quality, increased flexibility, risk mitigation) can I expect? Who are my ideal outsourcing partners? How do I best structure negotiations and broker the most favorable terms? How do I implement the chosen outsourced model and guarantee a smooth transition?
  3. 3. Outsourcing Advisory Services The growth in business process outsourcing in various industries has been significant in recent years. However, there is a high rate of failure, due mainly to poorly analyzed relationships between the concerned parties. Outsourcing can be a major weapon in the battle to improve efficiencies and reduce costs its benefits are real and achievable. However, all organizations must examine outsourcing thoroughly and be aware of the challenges and pitfalls it presents. Problems can arise throughout the outsourcing process. The Adya Team advises buyers and providers of outsourcing services on the planning, design and management of successful outsourcing arrangements. The essential aspects of outsourcing are: t Performance based services the focus is on the output/outcome of the services with minimal prescription regarding the basis of delivery or assets to be employed. Performance measurements based on key performance indicators (KPIs) are a primary tool in assessing suppliers fulfilment of their responsibilities. Such KPIs must be meaningful, measurable, and readily available and within the supplier s control. t Size and duration of contract outsourcing contracts are ongoing; typically covering an initial period of three to five years with options for further extensions. t Transfer of assets and resources the transfer of people, equipment or facilities used to provide services from the customer to the supplier is common and presents many issues regarding valuation, intellectual property and personnel transitioning. t Breadth of responsibilities the supplier accepts responsibilities and risk for the activities associated with the provision of services. However the purchaser is always ultimately accountable for ensure the specifications are appropriate and the outcomes are suitable for the business needs. t Styles of relationship – outsourcing agreements typically assume a partnering style of relationship within expectations set by the service level agreement. t New skills under outsourcing, the organization s focus shifts from managing inputs to managing outputs. It becomes a contract manager rather than a resource manager. Skills in the areas of negotiation, contract law and administration, performance measurement, finance and audits all become critical to success. t Flexibility as the organisation s needs change so must the arrangement. Contracts must be adaptable to changing circumstances and requirements refreshed on a continual basis.
  4. 4. Some potential advantages and disadvantages are listed in the table below. Potential Advantages Potential Disadvantages Financial ♦ Cost savings through economies of scale. ♦ Unexpected costs – for those that are not explicitly in the scope of the agreement. ♦ Cash flow relief by supplier buying your assets and hiring your staff. ♦ Higher per unit of service costs if usage projections are above or below those agreed. ♦ Predictable costs-either through fixed or usage based price agreements. ♦ Cost of outsourcing itself planning, investigating, tendering, implementation and ongoing management. ♦ Costs are known as an invoice is paid for all costs, avoiding the traps of inappropriate or non-existent ♦ Once off personnel related costs outplacement, internal cost allocation. remuneration payouts, and union negotiation. ♦ Rebates or liquidating damages for non- ♦ Cost of additional skills and resources required performance of agreed service levels. managing the relationship. ♦ Potential litigation costs for contract breaches. ♦ Leakage of confidential information resulting in competitive disadvantage, adverse media, or legal liability. Flexibility ♦ Catalyst for organizational change – behavior, ♦ High exit barriers and irreversibility reduced cost- restructuring, rationalization, etc. effective options if arrangement fails. ♦ Shifting of expenditure from the capital to the ♦ Loss of control over decision-making, resource operating budget, which is usually less rigid. management, and daily operations. ♦ Remove inflexible work practices mandated ♦ Supplier inflexibility to economically meet changing by the public sector and unions. requirements on a timely basis. ♦ Access to leading edge, specialized skills. ♦ Exposure to suppliers financial strength and profit motive. ♦ Shorter lead times to take advantage of new technology and ideas. ♦ Supply restrictions – locked into a single supply source. ♦ Economies of scope (the variety of services able to be produced). ♦ Possibility of being tied to obsolete technology for supplier to achieve economies of scale. ♦ Access to technology without capital investment. ♦ Possibility of being forced to upgrade for supplier to comply with maintenance provision or to gain operating efficiencies. Eff iciency and Effectiveness ♦ Predetermined service levels parties are forced ♦ Exposure to suppliers’ lack of commitment – they to define and agree as to what is expected. may focus their attention on larger or more strategic customers. ♦ With pay for performance, suppliers are more responsive to performance complaints if it will ♦ Suppliers are not motivated to improve customer affect profitability. efficiency, as it will lower their revenue unless they receive a higher margin. ♦ Centralized support – often there will be one point of call at the supplier. ♦ Supplier will only meet service levels, not exceed them, without incentives. ♦ Enables technology catching up or leap- frogging – if converted to the supplier s state-of- ♦ Loss of in-house expertise – if it is allowed to happen. the-art infrastructure. ♦ Homogeneous orientated services pay more ♦ Efficiency motivation by converting internal cost if a tailored service is desired. center to a supplier profit center, however the supplier tends to receive the cost savings. ♦ Service changes must be negotiated – suppliers have responsibilities to other customers and must make a ♦ More frugal use of IT resources when paying profit. real money, users change their behavior.
  5. 5. In order to get started, a good first step could be to identify the goals, how outsourcing will fit with this business strategy, what impact it will have on the employees, how much do current activities cost, and what benefits can be expected from an outsourcing arrangement. A thorough approach facilitates the due diligence process to identify the outsourcing objectives and expectations, and to find the right partner for success. Strategy Development We take you through the process to determine the outsourcing strategy that best meets your organizational objectives - Internal, Multi-Sourcing or Selective, Partial, or Full outsourcing. We review industry trends and comparisons. Management Structure Define the management and/or governance of the outsourcing agreement. Identify the internal and external controls that are expected. Identify the organizational changes to support what is the best structure for interaction with providers and internal customers. Business Case Review strategic vision, business objectives and performance expectations. Develop future state vision of the organization and how the value of the outsourced functions will be increased. Evaluation of Risk Understanding the risk involved with outsourcing improves the success rate. Identifying risks related to service level expectations will reduce risk exposure over the life of the contract. Evaluation of Vendors We develop the best method to select an outsourcing provider. Vendors can be internal or external to the organization. Vendors should have the ability to define relationship management, how they measure success. Outsourcing in Financial Services The wage structure for many organizations is not in synch with the best in class. Large organizations have the opportunity to reorganize their and corporate support services to provide better support to end customers while significantly reducing the cost of providing these services. Many best of class organizations have chosen to use a shared services framework to restructure the delivery of these services. There are many forms of shared services, however a common theme across all of them is a reduction in inefficient and unnecessary diversity of systems, processes, locations, and organizations delivering the same service. For example, a retail loan processing application in a bank can be outsourced to a shared services center by clearly identifying the activities, mapping the roles/ profiles and developing appropriate risk mitigating strategies to deal with process breakdowns. The following example highlights the importance of using detailed mapping and assessment tools to identify the right outsourcing opportunity for shared services.
  6. 6. Legend P1 is 'Priority 1' Process in which Retail Loan Applications - P1 - As Is member is to receive funding within 1 hour System Interface (CUBE unless noted) Estimated Time to Completion - 15 minutes Start Manual Process Additional time required for: (in branch) Auto Loan - 20 minutes Decision 1 Lending Manager FSR and member complete application Complete name, product 1 2 type, telephone number, and FSR accesses additional services sold Fast Loan (insurance, etc.) Platform Prints application 8 (for member FSR faxes signature) application, cover sheet, & QA Sheet (if necessary) to Consumer Loan Center 4 3 10 Yes Blue Book ordered Auto Loan? If fax/queue not 9 online received the FSR No Fax received is contacted for by CLC*? resending Yes No 6 5 Requires vehicle Go to P1 FSR completes QA Sheet inspection, VIN number, Processing cover sheet completed etc. for private auto sales 7 Notification sent to P1 queue 1 *CLC - Consumer Loan Center
  7. 7. Legend P1 is 'Priority 1' Process in which Retail Loan Applications - P1 - To Be member is to receive funding within 1 hour Estimated Time to Completion: System Interface With FSR - 15 minutes (up to step31) (CUBE unless noted) Member Terminal - 10 minutes (up to step 31) Additional time required for: Manual Process Secured Loan - 2 minutes Auto Loan - 20 minutes FSR modification of Member Terminal Activity - varies Decision Check print in branch (step 33 onward) - 15 minutes Lending Manager FSR Start Member Terminal 6 1 Member accesses FSR accesses Complete application Fast Loan Fast Loan Platform & Platform completes loan Prints application detail (for member signature) 7 Member queues Profile to FSR 2 Individual or Joint Joint? 8 FSR reviews Individual Profile 10 Amend Profile 4 3 (Relation Form as Nonmember Member or Complete Relation necessary) Nonmember Form 9 5 Profile No Complete Member complete? Form as nonmember Member Yes 11 Prints application (for member signature) 12 Secured Auto Loan Type? 13 14 Complete Blue Book ordered Collateral Form Other online 16 Requires vehicle 15 Order & Receive inspection, VIN QA Sheet Credit Report number, etc. for completed Online private auto sales Go to pg 2 P1 Decision Tool
  8. 8. In a typical banking back office environment as shown below, a detailed analysis of processes needs to be done to determine the suitability of the appropriate shared services structure. BANKING BUSINESS FUNCTIONAL MODEL BANKING BUSINESS FUNCTIONAL MODEL BACK OFFICE OPERATIONS BACK OFFICE OPERATIONS Deposit Operations Deposit Operations Credit Operations Credit Operations General Operations General Operations Account Account Account Account Credit Credit Correspondent Correspondent Federal Reserve Federal Reserve Origination Origination Origination Origination Accounting Accounting Services Services Clearing Clearing Deposit Deposit Credit Credit Credit Credit Call Center Call Center Regulatory & Regulatory & Acceptance Acceptance Approval Approval Release Release Operations Operations Compliance Compliance Deposit Deposit Credit Credit Review & Review & Billing Billing Reporting Reporting Accounting Accounting Documentation Documentation Monitoring Monitoring Interest Interest Cash Cash Payment Payment Management Management TECHNOLOGY & COMMUNICATIONS TECHNOLOGY & COMMUNICATIONS Software Software Hardware Hardware Services Services Networks Networks Internal Projects Internal Projects Security Security CORPORATE SERVICES CORPORATE SERVICES Finance Finance Real Estate Real Estate Human Capital Human Capital Tax Tax Other Services Other Services §§Accounting § Real Estate § Human Resources Internal Audit Internal Audit § Planning § Marketing Accounting § Real Estate § Human Resources § Planning § Marketing §§Budgeting & Planning Budgeting & Planning Management Management § Benefits § Benefits § Tax Returns § Tax Returns § Legal Services § Legal Services §§Treasury Management Treasury Management § Facilities Management § Facilities Management § Training § Training Regulatory Regulatory § Tax Accounting § Tax Accounting § Inventory § Inventory §§Close & Consolidation Close & Consolidation § Recruiting § Recruiting § Data Retention § Data Retention § Procurement § Procurement Reporting Reporting §§A/P, A/R, G/L, F/A A/P, A/R, G/L, F/A § Project Mgmt. Office § Project Mgmt. Office Key Includes Short, Mid and Long Term Opportunities Includes Mid and Long Term Opportunities Analysis must be conducted to determine the most appropriate type of shared services organization for each business area. Below are the most common types of shared services organizations. Major Types Description Sample Processes Handles routine transaction • Procurement Center of Scale based processes by leveraging • Accounts Payable Services economies of scale and • Payroll standardization. • Travel & Expenses Concentrates expertise to • ERP COEs Center of Expertise provide high-value services to • Tax/Treasury Services internal customers at • Benefits competitive cost. • Legal Establishes a partner • Internal Consulting Business Partner relationship between Services Services organizational units to achieve • Strategy common goals. • Reengineering • Government Provides a structure to support Corporate Steward central mission critical Relations Services • Compliance objectives. • Fiduciary
  9. 9. Each of these shared services models will have different governance structures. The key elements of governance structures are explained below: t MISSION, VISION and CORE VALUES: Provides purpose and vision for the organization. Defines the ability of the organization to resolve differences in priorities. t CULTURE: Determines how members of the organization behave toward each other, customers, and strategic partners. t ECONOMICS: Defines the approach to resource allocation and priority assessment to map resources against approved initiatives. t STRUCTURE and PROCESSES: Determines how the work of the organization is managed, how the organization is managed, and sets out the key roles that members of the organization will perform. t CUSTOMER INTERFACE: Defines the nature of the relationships between the organization and its customers. t INFRASTRUCTURE: How the organization uses technology, organization design, standard practices and behaviours to support its management processes and structure. These different types of shared services organizations do have some common characteristics. These are described below in a discussion of what shared-services is, and just as importantly what shared services is not. Shared Services IS: t Commonized support processes and systems to provide better service to business operations. t Separate organization providing services focused on customer satisfaction and continuous improvement. t Re-designed business processes that emphasize value creation and measurement. t An organizational evolution through which some support processes may be identified as good candidates for outsourcing. Shared Services is NOT: t A move to centralize internal support processes under one roof, operated under a corporate mandate. t Re-engineering existing support processes without considering the context of the larger business processes that they support. t Simple cost reduction measures achieved through process consolidation and FTE elimination. t An internal push to have all non-core business processes performed by outside service providers. Outsourcing provides great opportunity, however, one must analyze the opportunities carefully and implement them with commitment and rigor to mitigate the significant risk inherent in outsourcing.