Strategic Value of Implementing Shared Services
The Shared services were in vogue during the 70’s and 80’s in the US. Large organizations set up shared services in the US to optimize/reduce administrative costs. With the Telecom revolution in India during the 80’s resulted in the beginning of a new Industry in the 90’s when GE Capital International Services and AMERICAN Express set up their Captive Centers in India and that was the beginning of the ITES (IT Enables Services) in India. From there on this sun rise Industry revolutionized India and in 2017-18(E) has generated ~US$28.4 billion revenue in India (Source: NASSCOM SR-2018) and Employing about 1.19 million (Source: https://meity.gov.in/content/employment) in 2017-18 (E), this is just direct employment. The industry also gave rise to several ancillary industries like Travel & Transport, Hospitality, Telecom to name a few and a boost to a host of other industries.
Early Days of the Shared Services or Outsourcing: Shared Services or Captive centers were an extension or an entity of an existing organization setting up their centers globally at cost effective locations like India, Philippines as off-shore locations, Poland, Romania, Hungary Europe Region, Costa Rica to cater to LATAM region as near shore or on-shore centers. The primary focus was to leverage Labour arbitrage to do administrative tasks focused on Non-Core or Administrative tasks like Finance and Accounting, Indirect Procurement, Payroll, Recruitment and Customer Relationship Management (CRM or Call Center). An Organization setting up there own Captive center just purely on labor arbitrage saved about 30-35% conservatively.
In early 2000 with the IT industry maturing, organizations having implemented ERP’s for their administrative tasks, we saw the growth of Third Party or Outsourcing of administrative tasks. Cost effective countries like India, Philippines immensely benefitted, as BPO providers started setting up their centers in these countries and all non-English work in Poland, Romania, Hungary Europe Region, Costa Rica to cater to LATAM region. BPO’s (Business Process Outsourcing) wherein Organizations instead of setting up their own Captive Centers started looking at Organizations that were focused on Outsourcing. Organisations were looking for experts in this space and were not keen on investing and setting up their own centers.
By Outsourcing, Organizations moved away from focusing on non-core or Administrative activities. The Outsourcing organizations (Service Provider) brought in the expertise to drive standardization, optimization and possible elimination as well. As part of move or transitioning work from the client to third party involved designing, creating process flows of the activities being performed and then the Service Provider send their employees to the client location for Knowledge Capture, during the initial days, the service provider used to send their employees for anywhere between 16-18 weeks, but today with the use of various tools and technology the transition cost which is a sunk cost for a client has been significantly reduced to 4-8 week of onsite training followed by off-shore training and then GO-LIVE.
Earlier days, the focus during design phase was more on how the work could move to Off-shore or Near shore locations, but today when a BPO Organizations are proposing their solutions they are focusing on Transforming the Activities and shifting residual work to Retain and Right source the work. The term now being used is Right Source rather than Outsource. The Service providers are now more looking at how to eliminate manual tasks rather than moving manual, repetitive tasks off-shore as retaining talent on repetitive tasks continues to be a challenge.
Strategic Value of Implementing Shared Services:
Late 2000 and beginning of 2010 BPO Organisations not only focused on labor arbitrage but also looked at Tools and Technology or bolt on tools that could help further optimize and eliminate manual tasks. Some of the tools that could further enhance service delivery like Work flows, OCR (Optical Character Reading), Account Reconciliation came into existence.
The BPO providers are now focused on developing Platform solutions across towers, that includes a host of Tools and Technology, Robotics Process Automation and Analytics so that the client organizations can benefit from radically transforming their back office functions. They are also implementing Block Chain solutions across spectrum of back office functions. With the rapid use of Tools and Technology the focus is on Elimination through Continuous Automation and the outsourced activities being Core to a BPO provider they are looking at Transforming Back office functions.
Even today a lot of transactional activities across back office functions continue to be performed at Shared Services or BPO Centers, unless Affordable Platforms enabled by robust tools and technology do not eliminate manual tasks the Client organizations tend to retain high end activities like FP&A, Reporting, Management accounting or Direct Procurement. So it is in the interest of Shared Services or BPO Providers to go up the value chain they have to eliminate manual tasks only then clients would look at moving high-end tasks to Shared Services or BPO.
The contract terms that was as long as 7-10 years in the initial years is now rapidly sinking as clients are looking at short term contracts of 3-5 years and renewing based on value and experience. BPO Organizations are also looking at innovative ways of revenue model from HC based models to Transaction pricing to Outcome based models.
Future of Back office Functions has to be Technology/AI Enabled Shared Services or BPO with Analytics. As Analytical models will enable back office functions to not only optimize cost of operations but also provide insights enables revenue enhancement opportunities. If BPO organizations are not embarking on a Technology journey and rapidly transforming, then the clients will look at alternate BPO Providers that can radically change the back office land scape with Technology cause the earlier myth of exit barrier of moving from one provider to another no more exist as activities are being digitized and manual effort on transactions are diminishing. Tools and Technology, AI, Analytics are all the means to Transformation and not the end of back office functions.
About Anil Ramakrishnan
Anil Ramakrishnan (Director Business Process Transformation-UPL) has more than 22+ Years in the Shared Services Industry having set up Shared Services across India, China and Philippines cutting across Industries and Regions for Fortune 500 Organizations. He started his shared services journey with American Express and prior to joining UPL as their Business Process Transformation Leader, he was the Global Practice Delivery Leader in IBM for Finance and Accounting. His expertise is in Setting up Shared Services, Optimizing and Transforming Back office functions.