Earnings pressures boost shared services.

• Author: McReynolds, Scott
• Position: Shared Services

Squeezed by the economic slowdown, competition, low consumer confidence and high labor costs, companies' responses are drastic -- closing locations, laying off employees and moving to cost-efficient operating models.

The search for identifying cost-reduction opportunities has led large, multi-division companies to implement 'shared services" models. This involves eliminating redundant and unnecessary support or "back office" costs by sharing centralized services across multiple units within an organization. Non-core business functions labor costs - which can amount to a significant percent- moving age of hard -earned sales revenues - tend to grow proportionally large when duplicated at multiple locations. Support costs include accounting, payroll, purchasing, information technology, human resources, legal and tax.

Several factors have led to the increase in shared services operating models, the primary driver being cost reduction. Studies of companies that changed to shared services indicate that they received a large and quick payback. According to the 2001 Andersen/akris.com Shared Services Study, 29 percent received payback in years 1-2 and 77 percent by years 3-4. (akris.com is a U.S.-based shared services Web site.) In addition, 34 percent of the companies participating in the study realized direct headcount-related savings of 20-40 percent.

Companies with savings of over 30 percent generally utilized standard technology, such as a single enterprise resource planning (ERP) platform, and best practices to achieve high productivity and low employee turnover. The first 50 percent of those savings generally come from consolidation, the next 25 percent from standardization and the last 25 percent from subsequent improvements in the process.

Another major catalyst for implementation of financial shared services at companies with multiple ERP platforms is an enabling technology known as enterprise application integration (EAI). EAI enables companies with multiple ERP or custom software platforms to utilize a single financial platform (such as Oracle, SAP, JDE, Lawson) in the shared services center without changing the existing platforms used by multiple operations and business units. EAI leverages a middleware platform, such as MQ Series from IBM, which improves the management and maintenance of interfaces between a central finance platform and the company's disparate business units' software platforms.

Common Operating Model

Since the late 1980s, large, decentralized companies such as Ford Motor Co., General Electric Co. and Baxter International Inc. have been consolidating support operations into versions of shared services centers. In the early '90s, AlliedSignal Inc. developed its world-class financial shared services centers, generating approximately $40 million in annual savings through consolidation, restructuring and process re- engineering (Peter Moller in Andersen's Shared Services Handbook).

Recently, Hallmark Cards Inc. began developing its financial shared services strategy. Brian Kurtz, Hallmark's financial shared services director, explains the decision: "Financial shared services will allow Hallmark to improve efficiency and reduce costs related to essential transaction processing activities (i.e., accounts payable, travel and entertainment, general ledger). We believe common financial processes...