The rush into global markets is changing not only where U.S. companies do business, but how they do it. One of the effects of globalization is the rise of shared services as part of the new global model. As U.S. companies expand and acquire foreign firms, the high cost of operating redundant administration and finance departments in each country is spurring consolidation of back-office functions in shared-services centers. In contrast to the centralized support offices of the past, the new shared-services centers operate as free-standing businesses, usually with their own executive team and an explicit commitment to providing the best possible services for the business units that are their internal customers. Finance is often the first function to move into shared services, and finance executives are leading the way in this new and rapidly growing part of restructuring businesses along global lines.
Pat McCormick, partner, North American Finance Business Solution Team for Arthur Andersen LLP in New York, believes shared services can facilitate global expansion. "Companies are spreading out across Europe and taking advantage of shared-services center capabilities. The cost of doing finance in Europe has historically been about one-and-a-half or two times as expensive as the costs in the United States because of statutory requirements, and because companies could not achieve economies of scale. Moving the back-office processing to one location in Europe allows companies to achieve economies of scale and to attract the best people for specific tasks."
The Shared Services Forum, an Internet-based network of shared-services experts, estimates that more than 40 percent of the Fortune 500 use shared services, up from 20 percent just three years ago. While some companies limit their shared-services centers to finance, legal and human resources functions, others are adding marketing, purchasing, communications, public relations, customer service, information technology (IT), and research and development. Although IT makes the geographic location of the centers relatively unimportant, successful centers require a talent pool of technologically competent and multilingual workers, and a solid telecommunications infrastructure. The Netherlands, Belgium, the U.K. and Ireland are the leading locations for U.S. firms opening shared-services centers in Europe.
Cost Savings Plus Improved Performance
Initially, the motivation to move to shared services focused on the potential for dramatic cost savings, with reductions of 25 percent to 40 percent reported by some firms. By consolidating functions that were once duplicated across divisions and locations, companies can slash administrative costs. Recently, however, the growth of shared services is increasingly linked to the broader restructuring of businesses along global lines and the need to establish solid platforms for rapid global growth. The success of shared services is now measured not just in cost savings but also in meeting performance standards and improving services by pooling expertise. Companies are finding that shared services offer the same benefits and economies of scale as earlier models for centralization but with lower head counts and greater accountability to internal customers.
Examples of companies with successful shared-services centers cited by the Shared Services Forum include Tenneco, BP Amoco, Shell International Petroleum Co., Mobil Corp., Monsanto Co., Ford Motor Co. UK, General Electric Co., DaimlerChrysler and Westinghouse Electric Co. Although U.S. companies may develop shared-services centers on a purely domestic basis to consolidate functions for different business units, the real rush to shared services has occurred among corporations that are rapidly expanding their global operations and need to centralize far-flung operations as they expand. The transition to the euro should accelerate the move to shared services in Europe.
About 400 U.S. companies have established centralized administrative operations in the Netherlands over the past three years, according to Onno Ponfoort, Northeastern area director for the Netherlands Foreign Investment Agency in New York. "When U.S. firms think about expanding into Europe," Ponfoort explains, "they are looking for a location from which they can reach out to the entire continent, not just to one or two countries. In the Netherlands, there is a highly developed infrastructure and a number of third-party service providers who can perform tasks for a company."
U.S. companies are drawn to the Netherlands, Ponfoort says, because it offers a multilingual labor pool, with many workers fluent in three or four of the 15 official languages spoken in Europe. "Shared services are not particularly capital intensive," he notes. "They rely on information technology and a telecommunications and data communications infrastructure, good third-party service providers and a talented labor pool. Third-party service providers allow U.S. firms to have world-class support without trying to hire and supervise employees from thousands of miles away."
Ponfoort says that there are two ways U.S. firms commonly enter the European market. One way is to go into one of the two or three major markets most often the U.K. or Germany to establish a presence in that market and then expand from there into the rest of the continent. The other way is a more pan-European approach, reaching out to all 15 countries in the European Union simultaneously. U.S. companies that choose the second path are establishing shared-services centers in countries such as the Netherlands to provide them with a base.
Ashland Inc., a global diversified energy and chemical company headquartered in Covington, Ky., turned to shared services to facilitate global expansion. Ashland established a shared-services center in Rotterdam, Netherlands, in 1997, with 70 employees in accounting, treasury, legal services, information technology and human resources. The center also handles intercompany netting, centralized cash management and fiscal planning. According to Joe Corry, director of Ashland Operations Europe and managing director of Ashland Services B.V., setting up the shared-services center occurred in several steps over the course of a year. "We were growing our business so fast in Europe, and we wanted to have more of a common platform for future growth," Corry says. "As we brought in new acquisitions, we felt that we did not have all the resources in place in Europe, so we decided to put some dedicated resources together."
Ashland generally tries to hire and promote from within, so it staffed the Rotterdam office with people transferred in from other Ashland operations in Europe. This also helped the company achieve a mix of skills and country knowledge. "For a shared-services center to work," Corry says, "it cant just process documents, produce financials and renew contracts it must really understand the needs of the businesses." To meet the needs of eight different businesses in 60 locations, Ashlands shared-services center must satisfy all the country requirements and necessary regulatory standards. The center uses the U.S. Generally Accepted Accounting Principles (GAAP) accounting system for consistent measurements on a global basis. For tax purposes and fiscal requirements, the center produces local country statements as well.
Mid-Size and Smaller Firms
Although most of the companies that have pioneered the move to shared services are Fortune 500 firms, mid-size and smaller companies are increasingly moving into shared services with notable success. ESG Re Ltd., a Bermuda-based reinsurance company with $180 million in annual premiums and offices in London, Toronto, Miami, Hong Kong, Hamburg, Germany and Sydney, Australia, is in the process of establishing its new shared-services center in Dublin, Ireland. Twenty employees will handle finance, accounting, treasury, legal, information systems, human resources and insurance processing. Joan H. Dillard, CFO, has been leading the company in its move to a shared-services center. "We believe that the way to be successful is to have a local presence for the day-to-day customer focus people who know the culture and the environment in each marketplace," says Dillard. "We wanted employees out in the field to focus on marketing and production, not on day-to-day administration and processing, so were moving those functions to our shared-services center in Ireland where that work can be done on a consolidated basis."
Although the immediate cost savings ESG anticipates are not dramatic Dillard estimates a reduction of about 5 percent in the total service budget the cost factor is important given the firms rapid expansion. "We are growing by more than 50 percent a year," Dillard says, "so if we can hold the line on expenses or even reduce them by 5 percent, that will mean a lot as we go forward. We had to look at where we could put a platform that would support the kind of growth we envision. Most of our support staff is now in Germany, and its no secret that German labor costs are relatively high. When we projected our growth, we had to ask if Hamburg was the best place for us to expand, and the answer was no." Dublin offers ESG a pool of skilled workers at lower labor costs. "We look at our shared-services unit as a business," Dillard says. "Our success will come from making our services so good that none of our business units will have any reason to look elsewhere for cash processing or information systems or any of the other business services they need."