European Companies Turning to Finance Shared Services To Drive Cost Savings

LONDON - Finance shared services organisations (SSOs) have now become a proven and standard approach for most European companies, helping to cut the cost of finance operations by over 20% while enabling them to improve quality, productivity, and customer service by up to 40%, according to new Book of NumbersTM research from The Hackett Group, a strategic advisory firm and an Answerthink company (NASDAQ: ANSR).

Hackett’s research also predicted that the use of offshore SSOs by European companies is expected to expand significantly over the next two years. Recently many European companies have shifted from a national to a global SSO model, expanding their finance SSOs to service multiple countries. Historically most companies have chosen to locate SSOs in their headquarters country, and only 7% of all European companies’ finance SSOs are located offshore today, to take advantage of low-cost labour markets. But nearly 40% now say they are planning changes in this approach, and are considering or investigating how best to move SSOs offshore.

According to Hackett, European companies will also continue to expand the work scope of their SSOs to encompass functional areas outside of finance, such as HR, and to move beyond transactional activities in finance, where SSOs are now mature, to incorporate non-transactional functions such as decision support and reporting.

SSOs are perhaps best compared to a form of “internal outsourcing” which enables corporations to achieve improvements in efficiency and effectiveness through the creation of a separate internal entity that performs specific back-office activities in finance or other areas. The creation of an SSO generally involves more than just centralisation and consolidation of similar activities in one location, and often includes streamlining and standardisation of processes along with improvements in technology usage. SSOs are usually run like a business, and endeavour to deliver services to internal customers at levels of cost, quality, and timeliness that are competitive with alternative approaches such as outsourcing.

Joel Roques, Head of European Advisory Services for The Hackett Group, explained: “There’s no question that SSOs have been an overwhelming success for European companies, enabling them to save money while improving performance. Now, companies are planning to take the next step, looking at globalisation and moving beyond just transactions and finance to take onboard added-value initiatives and new business functions, like human resources. In the next few years we also anticipate that European companies will significantly increase their use of offshore resources for SSOs, to take advantage of the clear labour arbitrage opportunities that are available.”

In related research issued in late 2006, Hackett found that Europe’s top 500 companies could potentially generate up to €14.4 billion (£9.7 billion) in annual savings by increasing their offshoring of key finance functions. When opportunities in other key back office areas such as IT, HR, and Procurement are taken into account, the potential savings total €48.0 billion (£32.4 billion) annually.

Hackett’s latest Book of Numbers research edition, “Globalization: The New Horizon for European Finance Shared Services” offers findings from the fifth annual study of its type by Hackett. It found that nearly three quarters of all European companies have established finance SSOs, and most are generating significant benefits as a result. Eighty four percent of all European companies using finance SSOs saw cost savings of over 10%, and just over half experienced savings of over 20%. Most have also been able to generate improvements of between 10% and 40% in quality, productivity, and customer service as a result of their SSO efforts, according to Hackett.

European companies are beginning the process of globalisation, with Hackett’s research showing that 78% of all finance SSOs are now regional or global, supporting multiple countries. Two years ago, 60% of all finance SSOs were national, serving one country only. But most European companies still locate their SSOs in their headquarters country, even if they are based in Western Europe, where labour is expensive. So most European companies are still ignoring the labour arbitrage opportunities available through finance SSOs.

While 7% of all European companies’ finance SSOs are today offshore, nearly 40% of all study participants said they are investigating offshore options, evaluating which processes and activities to take offshore, and/or considering countries to base their SSOs. These European findings mirror those of Hackett’s U.S. research, which found that the use of offshore SSOs by U.S. companies is expected to nearly double by 2009, from 7% today to approximately 13%. The rapid growth in offshoring is part of the larger challenge of selecting sourcing options that deliver service excellence to business units at the lowest possible price.

Hackett also found that 80% of all European companies with finance SSOs intend to extend their operations to include more business functions, like human resources, and in more countries. This trend focuses increasingly beyond transactional activities to higher-value work, such as decision support and business reporting.

Hackett’s view is that the rise of globalisation as a competitive tool makes it critical for executives to consider business process sourcing options holistically such as where to locate processing, what to centralise, what to keep in house and what to hand off to a third party outsourcing provider.