Beyond Baseline: Considerations for Enhancing Shared Services' Cost and Control Benefits

Many finance executives have long appreciated shared services' potential to yield cost and control benefits. At many companies, the finance organization is the first to adopt shared services to perform functional enabling services: In Deloitte's 2011 global shared services survey, more shared services organizations (SSOs) included finance processes than processes in any other function. The use of shared services can allow finance executives to not only cut functional operating costs, but also reduce the cost and complexity of the internal control environment. In fact, 85 percent of respondents said that shared services had a positive impact on the company's level of controls.

As more and more companies implement shared services for their own finance organizations, however, any competitive advantage a company may derive from such gains will likely diminish. What forward-thinking finance executives should now explore are strategies for pursuing benefits beyond the "baseline" gains afforded by the standardization, consolidation, and automation inherent in many shared services implementations.

Fortunately, we see at least two potential ways in which they can do so. The first is to enhance shared services' cost-saving value by pursuing tax opportunities associated with implementing and expanding an SSO. The second is to leverage shared services to strengthen the company's internal controls over financial reporting in ways that go beyond the efficiencies that shared services typically generates.

Tax Can Add More Value Early

Most executives involved in a shared services project are well aware that shared services may generate both tax risks and opportunities. In the Deloitte survey, 76 percent of respondents considered at least one tax issue (such as the location of the shared services center, value-added tax (VAT) considerations, and legal entity type) as part of their shared services effort. But in spite of widespread tax awareness, only a minority of respondents (31 percent) felt that shared services had a positive or significantly positive tax impact on their business. This percentage seems somewhat low, given the large proportion of respondents who recognized that shared services could have tax implications.

Conversations with respondents revealed a possible reason for the gap between respondents' tax awareness and their companies' realization of tax benefits. While all of the respondents we spoke with knew of shared services' potential tax implications, their companies' appetite to pursue shared services-related tax incentives varied greatly. Focus and priority, along with time, seemed to be the determining factors: "We were so focused on cutting costs quickly that we didn't have the luxury of pursuing tax incentives," said one respondent.

One way companies may be able to increase the time and focus available for tax in a shared services project can be to involve the tax team from the very beginning -- even before developing the formal business case. The earlier a company consults tax leaders about a possible or planned shared services project, the more time they will have to research relevant issues, evaluate different scenarios, and identify resources to assist the shared services team at the appropriate times. This, in turn, can help the company create and evaluate the shared services business case on an after-tax basis, helping to reduce the risk of leaving value unrealized, inadvertently incurring penalties, and/or unnecessarily complicating compliance. Early tax involvement can also improve a company's ability to execute its planned tax initiatives, since the appropriate specialists are more likely to be notified in advance instead of being pulled in at the last minute.

As leaders of the function where tax usually sits, finance executives can help a company get more out of its shared services effort by asking tax specialists to explore questions like these with the shared services implementation team:

• How does shared services fit into the company's global tax planning? Especially at U.S.-headquartered multinationals, a company's global tax planning can both influence and be influenced by decisions related to shared services. For instance, the establishment of a shared services facility in a particular location can help support a company's assertion of business purpose.
• Are there any tax reasons to fund the shared services initiative from a certain country or countries? Issues related to intellectual property ownership, repatriation of earnings, and other considerations may play into a company's decision of how to fund part or all of a shared services project.
• What locations are being considered for the shared services center(s), and what tax implications are associated with each? Many countries offer tax incentives for locating operations in their jurisdictions. Beyond this, an SSC's location can affect whether its services are subject to VAT and how much VAT it must pay. Locating an SSC in a jurisdiction that imposes VAT could lead to VAT compliance requirements and require the SSC to build VAT costs into the transfer prices it charges for its services.
• How can the company align the timing of certain implementation steps with the pursuit of its tax objectives? In some cases, the tax impact of when a decision is made or announced can be as great as or greater than the substance of the decision itself. Announcing definite plans to build a center in a certain location, for instance, may affect a company's bargaining position with the selected local government around potential tax incentives.
• From which jurisdictions are operations being moved to shared services, and what could be the tax implications of doing so? Some jurisdictions may impose "clawbacks" in an effort to recapture the value of tax credits, deductions, or other incentives provided to a company that moves operations out of a jurisdiction before it has completed its obligations pertaining to the incentives. Identifying such jurisdictions and any potential forfeitures up front can help a company avoid unexpected additional costs of moving local operations to an SSC.

Internal Control Benefits

Although consolidating finance processes into an SSO can make internal control more efficient and less burdensome, these improvements may sometimes be an unintended favorable outcome of shared services rather than the result of a deliberate effort. We have further noted that companies that explicitly address risk management as part of their shared services effort may experience greater benefits than those that do not.

We see at least three opportunities for companies to use shared services to strengthen internal controls beyond the "baseline" gains typically driven by consolidation. The first opportunity can arise when a process is being redesigned for placement in shared services. An effective process redesign effort can be one of the few occasions that a company systematically examines a process from end to end. While the main focus of the redesign will likely be on standardizing and improving the process itself, the project can give risk and control specialists the opportunity to inspect, standardize, and improve the associated controls as well.

The second opportunity lies in the possibility of using the consolidated, enterprise-wide data housed in an SSO to conduct analytics. A broad-based view of the company's financial transactions, for instance, can help risk managers identify control gaps and weaknesses that could be difficult to recognize without access to the data on an enterprise level. Although an SSO may not accumulate the necessary volume of data until it has been up and running for some time, risk and control specialists can advise a shared services implementation team on what data the SSO should collect and how that data should be organized to support the desired analyses.

The third opportunity, exemplified by one responding company's finance SSO, is to leverage shared services personnel as another defense against breakdowns in control. "Risk is part of everyone's job description," said the respondent. "As you embed risk awareness into the makeup of people's job responsibilities, they become more proactive in looking at the little things, and those are often where the biggest risks can be."

Staying One Step Ahead

Even though shared services has become a widespread business strategy astute executives can still leverage the model for competitive advantage -- if they look beyond the immediate and obvious gains. We believe that tax and internal control represent two areas where many companies derive less benefit from shared services than they should. Paying appropriate attention to these areas in a shared services effort can potentially help keep a company one step ahead of its peers.

Richard Sarkissian is a principal with Deloitte Consulting LLP and has more than 25 years of consulting experience assisting numerous clients in all phases of defining and implementing finance, human resources and information technology shared services.