CEIBS alumni have been at the forefront of bringing advanced management approaches and technologies to China. Continuing this tradition, three CEIBS exchange alumni, who together formed a consulting firm in Shanghai, have been working with companies in China to implement Shared Services Centres. Mithras Consulting Group partners, Nick Rossiter and Sridhar Vedala, explain the transformative role Shared Services are playing in improving companies, competitiveness and effectiveness in China.
Shared Services: China Overview
China's dynamic economy has over the last decade attracted the majority of European, U.S. and Japanese multinationals to invest in China. During the initial phases of their investments, their business expansion in China has often been directed by individual business units, after gaining funding and project approval from global headquarters. This growth-oriented approach has downplayed integration and coordination in favour of market development. However, due to sustained growth and increasing competition, China subsidiaries are now being compelled to coordinate business units to seek cross-business unit synergies, scale, and cost savings. These goals are being achieved through transforming business units to focus on core operations, while consolidating their various non-core operations such as Finance and Accounting, IT, Legal, and HR at country or regional level.
The typical models adopted by companies to consolidate and standardise activities are:
Business Process Outsourcing: BPO involves the handing over of internal processes (and often the transfer off the relevant staff and fixed assets) to a third-party vendor, who ideally provides best practices and infrastructure to improve efficiency and sometimes reduce working capital requirements.
Shared Services: Shared Services Centres (SSCs) consolidate internal functions into an independent profit centre that must compete with external providers to offer services to the company's business units at market prices and service levels. SSCs may be centralised nationally, regionally, or even globally, depending on language requirements, the similarity of processes across geographies, legal restrictions, and individual company's strategies. Some companies have extended the shared services concept to create centres focused on core activities such SCM or R&D, often referring to these units as "centres of excellence".
While Shared Services keeps the assets on the balance sheet and on the internal group payroll, the unit effectively operates as a separate company, competing for internal work, and often external work as well. By contrast, BPO involves consolidating the processes with an external organisation, and may be thought of as something akin to an external SSC.
Further blurring the lines between what is internal and what is external, some companies such as GE have sold down their equity interest in their global shared services units, transforming them into an independent provider of business process outsourcing services. The key similarity between both modes is the need to compete for business and operate as a profit centre. As most processes and people that are turned over to a Shared Services or Outsourcing arrangement previously operated as a cost centre, the change in attitude and mindset can be huge.
Business Rationale
Sources of potential savings and increased effectiveness from these two similar approaches of shared services and BPO include:
Economies of scale. Potentially large savings gain accruing through spreading fixed costs over greater volumes and utilising more efficient high-volume technology and processes.
Competition. Sustainable savings and effectiveness gain accruing through having former cost centres compete for process work with the most efficient external providers.
Process re-engineering. Savings and effectiveness gain accruing through standardising processes around best practises.
Management focus. Savings and potentially large effectiveness gains accruing through freeing business unit management to focus on the core business rather than transactional administrative tasks.
Process specialisation. Savings and effectiveness gain accruing from using cheaper staff for lower-level transactional work, and from employing process specialists.
However, increased costs may result from greater communication requirements, employee turnover and dissatisfaction, management resistance, and increased IT and other investment. Typically, costs associated with the changeover mean that any savings will not be apparent for at least twelve months and possibly longer.
These types of initiatives cut across power bases throughout the entire organisation, and therefore require top-level leadership and organisation-wide commitment in order to be implemented successfully. If not well-planned and fully supported internally, the increase in costs in the early stages of implementation can often provide an impetus for disaffected managers whose power base will decrease to derail the transition, leading to a failed project. Nevertheless, international studies have shown average ROI's and headcount reductions of around 25% in the case of SSCs.
Key Success Factors
A shared services initiative requires absolute management commitment, organisation-wide restructuring and a transformation in corporate culture. Unlike mere centralisation, with shared services, the new unit operates as a profit centre. Among the changes required for success are a shift to a customer service orientation, a restructuring to achieve process efficiencies, and adaptation to competition with third party vendors on price and services delivery. Thus, any shared services initiative requires a change in corporate culture and an entirely new attitude to services provision.
Specific keys to success include: establishing shared goals based on a pragmatic vision; choosing the right people with the leadership qualities and attitude required to bring about the necessary change in corporate culture; re-engineering and standardising processes around best practices; and leveraging information technologies to harmonise processes and allow the external SSC to operate as if it remained internal.
Shared Services initiatives must also be considered in the context of the overall organisational structure. Shared Services Centres should be structured to fit the wider organisation, aligning reporting relationships, incentives and processes with overall corporate profitability and growth strategies.
Case Studies
NOL Group: One of the world's largest shipping companies, NOL Group operates subsidiaries including APL Shipping and APL Logistics. In China, NOL Group set up a SSC to handle the shipping consignment documentation China shipments in order to gain synergies across subsidiaries. Separately the group also entered an agreement with Accenture to handle their finance and accounting processes globally at Accenture's BPO centre in Shanghai.
Bayer: A large German chemicals and pharmaceuticals group, Bayer has established an IT shared services unit called Bayer Business Services (BBS) with operations around the world, most notably in India. Mr. Herbert Schroeder, Head of BBS in the Asia-Pacific and based in Hong Kong, has been the driving force behind establishing and expanding the SSC in Shanghai, which currently provides IT support. A key concern has been the availability of qualified IT staff knowledgeable in areas such as SAP applications. Here, Mithras has been working with BBS to establish cooperative training programs with the software schools of famous local universities, and on developing an HR sourcing strategy.
Siemens: One of the world's largest and most diversified industrial groups, Siemens has realised the need to achieve efficiencies in the common processes of its disparate subsidiaries. Globally, the group has established Siemens Business Services (SBS) as a separate unit. India was chosen as the primary location to serve global subsidiaries, including China, due to the availability of large numbers of trained English-speaking staff at relatively low cost. At its main Indian site, dubbed "Siemens City", SBS has recruited many thousands of staff.
Akzo-Nobel: At Akzo-Nobel in China, the CEO, Mr. Anders Brostrom is currently driving the evaluation of adopting an SSC approach to consolidate HR, finance, legal, and corporate communications. The initiative is being driven from the top down to ensure that, if approved, "buy-in" and consensus among managers-ome of whose staff numbers may decrease-will be better achieved.
Maersk: Denmark-based Maersk, which is the world's largest integrated shipping company with operations throughout much of Eastern China, is no stranger to Shared Services. The company has established SSCs serving subsidiaries in different areas of the world, including China.
BASF: The world's largest chemical group now has over 100 operating units in Europe alone. These units have developed as a product of the company's historical growth, and most have their own HR, accounting and other support functions. On 1st March this year, BASF announced their intention to centralise European HR, finance and accounting functions in a shared services centre in East Berlin. The site was chosen because of the availability of multilingual, talented staff, overall costs, and the ability to reach a long-term agreement with trade unions. Following this announcement it is likely that BASF will extend this management approach by establishing SSCs in other geographies, including one serving China.
Modes of Entry
In establishing SSCs, different modes are being used to initiate shared services in China. These include: the entry of the company's global business services group into China (e.g. BBS in the case of Bayer); transforming business unit cost centres such as accounting into a shared services centre (e.g. NOL Group's consignment documentation unit); building new shared services centres (e.g. BASF); and managed outsourcing where the shared services group manages the outsourcing of processes to a third-party provider. Although China presently trails a long way behind India in some foreign companies, particularly in the banking and manufacturing industries, which are also starting to swarm to China to establish regional or global offshore shared services centres.
For companies considering outsourcing processes, China now boasts a world-class set of providers including Cap Gemini, GECIS (GE's former India shared services centre, now a global BPO provider), IBM, EDS, ACS and Accenture. These providers are starting to gain scale and experience, and are serving not only domestic subsidiaries, but also Japanese, the U.S., and European customers.
With Shanghai in particular growing as a base for establishing regional headquarters, some companies are choosing to co-locate their shared services operations with their regional headquarters. Fuji Xerox, for example, handles Account Management of global accounts for the whole of the Asia-Pacific with a small team based in their Shanghai regional headquarters. Other firms, however, are choosing to establish new shared services centres ("Greenfield operations") in locations such as Dalian where employees fluent in Japanese are widely available, or Guangzhou where Cantonese speaking staff are available. Greenfield sites have the advantage of distancing the shared services operation from entrenched cost-centre mindsets and sub-optimal processes.
Preventing Implementation Failure
Chief reasons for failed shared services initiatives include a lack of vision, strategy, and planning upfront, a lack of organisation-wide "buy-in" during the initial stages, a lack of leadership, and a lack of understanding of the cultural implications within China.
To help ensure success, Mithras recommend and provide assistance with tools such as:
Current State Analysis: a snap-shot of the organisational processes, required to develop a vision for transformation.
Organisational Restructuring: dismantling of existing structures and creation of new ones with greater focus on core competencies and incentives and reporting structures more aligned with the key success factors required to implement the corporate strategy.
Benchmarking: provides input into best practises for re-engineering and standardising processes to realise cost and effectiveness gains.
Business Case: a costed analysis of the pros and cons of shared services, required to substantiate the initiative's value and gain top-management "buy-in".
Ongoing project management and trouble-shooting also ensure that projected cost savings are achieved and any hiccups along the way are overcome.
Outlook & Conclusions
With increasing market maturity and competition driving companies to adopt more efficient and sustainable strategies, the shared services approach can be expected to continue to gain ground in China. A shared services forum held by Mithras at CEIBS earlier this year under the auspices of the CEIBS Alumni INFO Club attracted CEO's and senior management from companies such as Novartis, Akzo-Nobel, P&O Nedlloyd, DSM, Bayer, Degussa and Siemens, underscoring the importance now given to this management approach in China.
The idea of transforming dispersed cost centres into a specialised, scaled-up, profit-driven unit focused on electricity-like service provision at the lowest possible cost is proving to be as attractive in China as it has already been in other countries. However, successfully realising the gains and avoiding the pitfalls require careful planning, senior management commitment and organisation-wide transformation.
