Operational Excellence: Leveraging Multiclient Service Locations
The trend toward shared services, which has increased in popularity in recent years, reflects the never-ending campaign to boost the efficiency of back-office support functions. Today, when established economies face rising global competition from low-cost countries and the business climate is extremely volatile, it is critically important to maintain cost leadership and react quickly to change.
The Underpinning of an MSL
When companies set up internal shared services centers (SSCs) as a response to the need to drive down costs and increase efficiency, too often they do not achieve the planned business benefits. Lack of customer focus or drive toward continuous improvement, lack of buy-in from the rest of the business, and lack of appropriate governance structure all deplete the potential benefits. Furthermore, the new unit may still be regarded as a back-office cost center, rather than as a partner for business improvement and growth.
Many organizations today have the scale required to support a business case for implementing or expanding their shared services capabilities. However, when you examine the three cost pools typically associated with these centers, it becomes apparent that opportunities exist to genuinely drive down operating costs by introducing multiple clients into a single center. The ability to fully exploit economies of scale is at the heart of making multiclient service locations (MSLs) work. As you might expect, there are diminishing returns associated with the number of clients that are served by any single center.
Stepwise Performance Improvement
Companies leveraging MSLs can share fixed costs and assets as well as technological and process innovation. The infrastructure, management, transition skills, and operational tools already exist and can be expanded incrementally for each new client. As a result, companies can achieve more efficient back-office performance for a lower upfront investment. MSLs can help lower unit costs and drive down transaction costs. The concept of a service provision having multiple scale curves is relatively straight-forward (Figure 1). Understanding how to maximize performance within each range also is well understood. However, the ability to break through the domain expertise and scale ceilings with MSLs is where we believe the real advantage lies. With more businesses wanting to respond to intensified competition by focusing on their core competencies, the opportunity to achieve cost leadership through MSLs is alluring indeed.
Traditionally, companies have exploited shared services on a country-by-country basis – at best, for the most adventurous, on a regional basis. Yet, the size of service organization achieved by this approach is, of course, limited. It never reaches the point at which real economies of scale can be achieved. The obvious way forward – multicountry, cross-border centers – is seen as too complex, too risky, and too costly for any one company to embark on in isolation, especially in such a diverse region as Europe.
The MSL Advantage
The MSL concept provides an infrastructure, scale of operation, and pool of expertise to deliver services at significantly reduced costs while addressing the complexity of managing different human resource, legal, fiscal, and economic issues in each country. Moving back-office functions to an established, fully functional MSL enables rapid, multicountry transitions into a single service center.
A MSL service provider can bring specialist skills, innovation, and knowledge to bear that are simply too difficult or costly for a single client to manage. The MSL environment gives the service provider the opportunity to aggressively manage down the cost base by:
- Researching and implementing new ways to innovatively reduce costs
- Creating a specialist skills pool that is unit based, rather than by using traditional (and expensive) consultancy resources
- Relocating resources offshore, such as in Central or Eastern Europe or the Far East, in order to optimize labor rates
Operational Enablement
Operational enablement covers the process of moving the provision of services from separate locations to a new, shared services location (Figure 2). However, when a client is transferred into an MSL environment, a fundamentally different approach applies, one that seeks to effectively manage client risk while ensuring that valid scale benefits are achieved throughout the process. The effort involved in enablement in this case is greatly reduced as most, if not all, of the solution design, physical infrastructure, IT infrastructure, and HR infrastructure (e.g., unit management, recruitment, induction training) are already operational and simply need to be brought to bear for the new client. MSL environments are also likely to have experts in the operating environment (OE) process available to assist with the transitioning effort – and thus avoid the use of expensive consulting resources. The costs and risks associated with OE transfers into an MSL environment are consequently greatly reduced.
Service Delivery
In a conventional shared services environment, all aspects of service delivery from the new location are consumed entirely by a single client. These include:
- Service delivery resources, i.e., those visible to the client
- Support functions and infrastructure
- Software applications – innovations and developments
In an MSL environment, however, many service delivery aspects can be shared across a number of clients. In some cases, this merely enables the service provider to deliver the service at a lower cost. In others, the service provider is empowered to apply new technologies that would be too costly in a single-client environment.
In a single-client center, opportunities to exploit economies of scale are missed. This is especially the case for management positions in areas, such as accounts payable, where irrespective of the size of the department and the number of companies payables being processed, a single manager is required; or where expensive specialist skills, such as country specific legal and fiscal accounting knowledge, are needed.
Support Functions and Infrastructure
In addition to the front-end aspects of service delivery, there are significant areas of support and infrastructure functions where it is also possible for clients to make savings through sharing resources. Support functions are to a large extent a fixed, rather than a variable cost. Examples include:
- Human Resources – Responsible within the center for recruitment, reward structures, performance management, and training.
- Finance – Responsible for internal and external finance support to the unit itself.
- IT – Responsible for maintaining the LAN/WAN networks and desktops and for provision of basic office tools, such as time reporting, email, and Internet access.
- Office Services – Responsible for cleaning, canteen provision, and so on.
Physical infrastructure can generally be regarded as one-time set-up costs rather than incremental to each client contract. Its also possible within a MSL to share certain physical resources between clients, such as meeting rooms, reception, and facilities, saving on space and equipment and reducing costs. Types of physical infrastructure advantage can include:
- Aspects of the IT infrastructure – Such as a firewall, email server, and Internet server
- External contracts – Such as telecommunications and security
- Internal knowledge management – Such as training materials, procedures, audit control, and best practice processes
Software Applications – Innovations and Developments
Software applications in a shared services environment can broadly be thought of in terms of infrastructure tools, such as helpdesk and service management, efficiency tools including invoice scanning, optical character recognition and authorization, debtor collection scheduling and workflow, and service provision tools like the finance or ERP system used.
Making substantial investments in back-office functions is rarely at the top of the executive agenda. The upfront capital required for basic capabilities can be substantial. Consider the cost of creating a new platform that puts the function onto a state-of-the-art finance system, such as SAP, Oracle or PeopleSoft, or implementing a planning and forecasting solution, or simply driving functional efficiencies through workflow and optical character recognition. The returns, by contrast, can be at the very least insufficiently compelling. In an MSL environment it is often possible to make these changes on a shared basis so that the same solution can be used by – and the investment shared by – several clients.
The Acceptance of MSLs
Given the inherent disadvantages of internal shared services and the advantages of MSLs, many companies have turned to a third party for outsourcing of their back-office functions with clearly defined commercial outsourcing arrangements that guarantee the realization of enhanced levels of service at reduced cost. In some cases, they co-source services with other business. The most developed of these arrangements in terms of partnering – and potentially the most advantageous – is an MSL. A MSL is a geographical service location where identical or similar business process outsourcing (BPO) services, such as finance and accounting, are provided to more than one client in a way that maximizes both the benefits to the clients and the long-term potential of the service provider. Collaboration for mutual benefit is at the heart of the MSL.
The Case for MSLs Is Proven
While concerns about data confidentiality and client service dedication in multiclient environments cannot be disregarded, the intelligent implementation of safeguards can help mitigate these concerns. Employee contract confidentiality clauses, segregation of staff duties in particular areas, system security, and technical firewalls all help ensure client data confidentiality, while using the correct mix of resources dedicated to a particular client in areas, such as service/account management and management reporting.
Accentures own Delivery Center in Aberdeen, Scotland is a real-world example of how an MSL works in practice. It was established in 1991 as a traditional outsourcing center for BP Exploration, but now services five clients, all operating in the highly competitive cost-driven North Sea oil industry. The results of this center speak for themselves. Because of its continued success, BP now has top quartile accounting costs per barrel in the North Sea, which has been independently benchmarked. In order to achieve this type of operating efficiency, the Aberdeen center has developed a number of innovative tools, which are shared between the various clients of the center. These include:
- E-Invoicing – A Web-enabled workflow tool for supplier self service and invoice verification/authorization.
- Information Edge – A management information and planning/budgeting solution.
- SAP R/3 finance solution – A majority of the clients serviced from the MSL currently perform all their finance and accounting tasks on a shared SAP infrastructure.
Carefully applied, there is no doubt that the MSL concept is effective. The benefits to businesses seeking to address the issue of back-office cost and performance are clear. The MSL model is fast becoming the model for BPO. Because it guarantees a lower cost base and increased benefits, it may even enable a business to implement shared services or to outsource where the business case would not otherwise be attractive enough to proceed.
