Driving Continuous Improvement: Shared Services

Driving continuous improvement “The aggregation of marginal gains”

Accounting Shared Services are a central plank of any transformation towards a world class finance capability. They are a key finance tool for efficiency and an enabler for strategic flexibility, but achieving the process standardisation required to drive the desired cost efficiencies is a difficult business in practice. It is easy to see process standardisation at a high level but the devil is in the detail. Getting this right is delicate surgery. We need to ensure we are cutting the waste and not impacting productive business effort. Benchmarks show the range of cost efficiencies for organisations using Shared Services are as wide as for those that do not. This paper illustrates the reasons for this, discusses Shared Services efficiency and value creation, explores the new wave of continuous improvement and shares the role of Key Performance Indicators (KPIs), Key Exception Indicators (KEIs), Continuous Monitoring and Exception Analytics.

World Class Finance, Transformation and Shared Services

In today’s globally interconnected economy, CFOs face increasing challenges from shareholder expectations, regulatory pressures, advances in technology, globalisation, changes to accounting standards and fast moving business operations.

Finance leaders are working hard to evolve an optimised model for finance that helps both drive and support overall business performance. In the drive for increased efficiency and flexibility, leading organisations are striving towards a world class finance vision.

The cost of a world class finance function is approaching 0.5% of revenue according to The Hackett Group, down from as much as 2 or 3% a few years ago. Finance productivity increased by nearly 10% in the three years to 2012 and the demand for more is relentless. However, structural changes in business and the emergence of both stand-alone shared transaction services and global business services is challenging some of these benchmarks as the effort and costs involved, and thus comparisons between them, become less transparent.

The ‘world class’ finance function needs to drive down cost of operations while providing heightened levels of services as a true ‘business partner’ delivering the following key services:

Stewardship & Reporting
Accounting & Finance Operations
Business & Management Support CFO magazine offers us a kind of ‘Balanced Scorecard’ for the finance function when they describe the four pillars or dimensions of financial management, namely:
Efficiency: continually improve process efficiency, speed, and quality
Effectiveness: effective financial stewardship, risk management, control and compliance
Relevance: provide analytical insight that decision-makers need
Influence: proactively drive the business toward superior outcomes

Shared Services most commonly targets accounting and finance operations although we are seeing extensions into other classic ‘back office’ functions. Today the most common financial process under Shared Services stewardship is accounts payable, lagged somewhat by general accounting, fixed assets, T&E management and accounts receivable.

Driving Business Value From Shared Services

Industry research indicates that significant benefits from finance transformation and the shift to shared services have been realised. The same research shows greater opportunities in the future to drive further business performance and business value. Anecdotal evidence however, indicates that the benefits of transformation and shared services may be less in direct cost savings and more in the areas of strategic flexibility, scalability, enabling balancing of effort across all markets in different stages of the economic cycle and enabling faster, lower cost new market entry.

Research also indicates that the sheer scale of investment in new process, technology and change management has been significantly higher than planned for many organisations.

Shared services are clearly here to stay, whether implemented as a specific tactic to improve finance operations or as a catalyst to transform the business as a whole, often breaking down historical regional and country based silos of operational activity.

The common refrain that ‘transformation is a journey not a destination’, is a claim that cynics regard as a tacit confirmation that direct efficiency gains and cost savings are not all they are cracked up to be. That being said, perhaps ironically, the primary initial objective is always cost reduction. The longer term goal is typically to improve the business ‘outcomes’ of finance.

As finance and business service leaders focus on measurement, there is an increasing realisation that a full set of quantitative Key Performance Indicators (KPIs) reading ‘positive’ does not necessarily mean the client is happy. This is a lesson learnt by many open market service providers, and as always, creates some shades of grey in assessing the new model operation. It is nothing new to learn that KPIs tend to give rise to unanticipated consequences. As lagging, ‘after the fact’ indicators, KPIs are good for measuring outcomes but not well designed to offer actionable insight to improve processes earlier in the cycle.

AQPC recently published some interesting benchmarks on the cost of accounting illustrated below. In interpreting this data, I tend to assume the ‘bottom performers’ are not genuinely bottom of the market. An awareness and desire to benchmark and complete the detailed questionnaires, demonstrates some aspiration towards process improvement at the very least.

If nothing else (and of course the statistics are on a limited sample and there may be other variances in the assumptions), this chart illustrates there is something else significant that drives efficiency beyond simple centralisation of common services. Simplification, standardisation and automation are obviously key to this, but this is where the ‘devil in the detail’ starts to get interesting.

AQPC comment that large volumes of manual journal entries represent one area of the ‘productivity gap’. Our own experience also shows large amounts of redundant effort in supposedly standard Purchase to Payable and Order to Cash processes that can be eliminated. Practical experience is starting to shed some light here.

But even taking this data at face value, it is fascinating to observe that the performance gap between top and bottom performers in shared services is 8-fold. In fact, the spectrum of efficiency achievement is nearly twice as wide for organisations deploying shared services, compared to those where accounting services are distributed in local operations (i.e. the ‘old world’ model).

Of course, not all observers are completely convinced by the arguments for shared services. Management thinker Professor John Seddon, for example, is wary of evidence claimed for the economic benefits, as much of this evidence comes from sources with a vested interest. He sees the argument for economies of scale as a ‘flawed theory’ and believes there is little hard data supporting predicted or claimed savings.

There are also reported unanticipated ‘favourable outcomes’ of Shared Services especially with regard to control and compliance. Deloitte report that 85% of their 2011 survey respondents experienced positive impact on their level of control and
oversight.

Shared Services Evolution: The Third Wave

According to many commentators we are entering the third wave of shared services evolution.

The first was transactional consolidation where the organisations strove to realise benefits through centralising activities and consolidating systems. These vary from ‘Big Bang’ transformations where process, technology and organisation are tackled in one phase, with the associated change management headaches, through to the ‘Lift and Shift’ phased approach which many have credited with easing the transition. This phase was also often associated with the initial drive to business process outsourcing.

The second wave came in the form of a concerted focus on process efficiency and flexibility though process standardisation. There has been considerable effort expended on this with new process designs and associated new system implementations. Simplification and standardisation has had a massive focus and is often regarded as the ‘nirvana’ of Shared Services. Key questions have emerged, however, such as ‘How do we know when we have got there?’ How do we measure progress towards standardisation? How do we identify what is non-standard?

The current third wave emerging now is focused on continuous improvement and the drive for increased business value. Observers and practitioners are looking to find ways to exploit and analyse data to these ends. However, questions remain about this need for better data analytics as the process improvement paradigm is not the same class of problem as that which popularised data analytics in the sale & marketing customer profitability quadrant. This is all closely aligned with the move to end-to-end process ownership that reaches across Shared Services and beyond, seeking out and exploiting best practice and ensuring global implementation.

These three waves share two primary drivers of shared services value:

Less is more

Efficient management of common resources. Consolidation of managers, workforce, IT systems, facilities etc. drives more efficient use of resources and reduces cost by more efficient use, i.e., you use less in total than you did in a distributed world. This ignores of course the efficiency ‘drag’ of removing such functions and relationships from local operations, but that is a separate discussion. This was the primary benefit of the early waves of the shared services concept.

Simplification & Standardisation

A common process and IT system enforcing a single way of working reduces re-work, error, ambiguity, effort, customer misunderstanding etc. Ultimately, this reduces cost and improves cash flow and enables strategic flexibility and scalability. Additionally the re-engineering of processes in Shared Services becomes a catalyst for the re-engineering of the affected end to end processes across the organisation.

We know from many disciplines that standardisation drives efficiency and flexibility. But we also know that we don’t get true process standardisation by publishing new process definitions, implementing a new system or forcing standardisation of inputs and outputs. Human behaviour and initiative is very adaptable!

Standardisation, Processes and Systems

The common ERP technology platform has been both an enabler for end-to-end process integration and globally shared services and occasionally an inhibitor to operational acceptance. It appears that technology is sometimes also used as an inanimate target of frustration with the change process.

However, it is reported that approaching 50% of shared services organisations now run on a single ERP instance. This should surely help standardisation especially as a new system implementation is where the
‘rubber hits the road’ – the vision of common process meets the reality of operational momentum and necessity.
The real challenge is that despite their power, ERP systems or any other administrative system do not enforce business processes, they only enforce the process for data entry and capture. This subtle difference gives rise to a large gap between ‘achievable’ standardisation and
‘achieved’ standardisation and associated cost reduction. However, we know that when true standardisation is achieved, it also drives better information access and visibility which itself increases efficiency and reduces costs further.

Just consider a simple accounts payable process. To initiate an efficient automated payment we need a system to match an authorised PO, a confirmation of goods receipt and corresponding invoice. This simple three way match is designed to ensure we only pay for what we plan on, expect and receive. However our systems can only control the sequence of data entry not the actual business process. Have you ever considered what POs created on the same day as invoice postings or goods receipts might mean? In most cases it means the standard ‘process’ was never followed at all and the first evidence of the order was either a delivery or an invoice receipt. In this example we create apparent standardisation and the automated process lulls us into a false sense of security.
To take another common indicator of divergence from standardised process: it is common to see a high degree of change on both purchase orders and sales orders through their life-cycle, as the operational teams struggle to match the realities of their business demands with the control exerted by the new common system.

Orders get created with nominal values to get through system controls, and to start approval processes, get updated to reflect the desired detail later, and often demonstrate multiple price changes during the process. In addition to exposing financial planning and forecasting risk, this causes a great deal of unnecessary effort where no value is added.

When provided with the evidence and information on these ‘multi-touch’ orders for example, it is easier for process owners and transformation specialists to explore and understand what is causing the wasteful activity. In many cases, this gives rise to a very healthy conversation about the realities of customer or vendor engagement and helps the process owners understand that the ‘real’ process is not quite as anticipated, and sometimes with good reason. This allows a genuine collaborative process improvement dialogue to develop.

drive

So how can we better understand this ‘divergence’ from expected outcomes?

Think of the car park barrier in the image below as the ‘control’ enforcing a standard process for access and use of the car park.
The automatic gate opens only when you swipe your employee badge on the reader and it only lets one car through at a time. This way, it is clear that only authorised people can use the facility and that a record is kept of each visit. The automated process works perfectly and as designed. There is even a regular testing and maintenance cycle of the barrier!

The tyre tracks on the snow, however, tell us whether this process is really working as expected.
Obviously not!

The tyre tracks show us deviation or exception from the standard and should stimulate us to understand how often it is happening, why the exceptions happen and refine the process accordingly.

This illustrates clearly why we need analysis of process exceptions so we can understand them and take action. It is important to validate our ERP system is doing what is expected of it, but it is even more important to analyse the `tyre tracks’ of business process exceptions. The tyre tracks tell us what is actually happening and the level to which our desired standardisation is happening in practice. They also help us diagnose root causes.

What is needed is a better ability to measure, compare, diagnose, resolve and drive action on detailed exceptions at key points in the process.

Exception Analytics -The need for better diagnostics to guide action

We need a better process for driving continuous improvement. Performance measures or Key Performance Indicators (KPIs) are a good start but these are typically lagging, ‘after the fact’ indicators of aggregate outcome. Common practice is to try to drive process improvement by identifying deviance from aggregate performance indicators, such as Days Sales Outstanding (DSO) or Average Cost per Invoice Processed. To identify the root cause of such a general deviation is tricky. It is too late when the KPI moves into negative territory and we have no data to identify cause or to drive resolution and improvement.

Say, for example, the DSO performance measure is 41 days, whatever happens to individual receivables the flag is only raised when the aggregate DSO exceeds 41 days. This has some serious implications. Firstly, it is a very lagging indicator and by the time DSO hits 42 or 43, working capital is already hurting. Secondly, the indicator tells you little about the cause – is it a general deterioration or a couple of very large receivables or certain customers with specific issues? Thirdly, this approach does nothing to help predict or avoid the scenario of deteriorating DSO.

Advocates of this approach claim that continuous improvement specialists should be always ahead of the curve talking to accounts receivable and credit control staff to understand latent issues. However, in a large organisation this is like looking for needles in very large haystacks. Perhaps it is not surprising that although continuous improvement ranks highly as a priority in surveys of Shared Services leaders, it also reports a lower level of success than desired.

Whether you adopt the ‘Plan, Do, Check, Act’ continuous improvement philosophy or a Lean approach to eliminate non- value added activities with a ‘Define, Measure, Analyse, Improve, Control’ cycle, the challenge remains measuring and analysing with a level of detail and precision.

The cycle in the following image illustrates the problem in the typical cycle of continuous improvement with the need for ‘divine’ intervention to identify root causes…

We can measure results at the KPI level, as we have discussed, but we need a sharper instrument to analyse the detail of process exceptions early in the process cycle, so we know what to fix.
To solve this problem we need to create some leading indicators that give a better idea of what might go wrong that would later result in damaging a lagging KPI.

When we know ‘what bad looks like’, we can keep a (virtual) eye out for it, address it early and avoid major impact on our key KPIs as well as overall financial performance. These leading indicators of ‘what bad looks like’ are termed Key Exception Indicators (KEIs).

Identifying the KEI, or ‘what bad looks like’, is about defining exception conditions for critical elements of the business processes. When we know these exception conditions, we are halfway to a much more coherent and holistic continuous improvement process. We can now automatically monitor for these process exceptions at a point in time for benchmarking purposes or continuously as the fuel to drive continuous improvement. The role of this exception identification, diagnosis and remediation is shown in a refined and more effective Continuous Improvement cycle below.

Consider an example: What can go wrong in the Purchase to Pay/Accounts Payable cycle to damage the lagging KPI, ‘Total Cost Per Invoice’? Here are some of the culprits:

‘Multi-touch’ purchase orders and invoices
Lack of purchase order
Invoices not clearing three way match
Inconsistency between purchase order
and purchase requisition
Invoice dispute – mismatch between
agreed/expected terms and vendor
master data
Duplicate invoices
Blocked invoices
Differences in quantity or value between
receipt and invoice and purchase order
Invoices with no goods receipt

Consequently, we need to identify and analyse these exceptions, not just in aggregate terms, but in detail so that we can fix the process.

In one organisation 9% of indirect purchase orders were undergoing price changes after creation generating considerable downstream effort of no value to the business and 2% were undergoing payment term changes. 5% of purchase orders had payment terms different to those agreed and held in vendor master data. This was all driving efficiency downwards and the cost of finance up. Not the ideal trajectory.

On the revenue side of the business, what can go wrong in the Order to Cash process that might result in damage to the ‘Days Sales Outstanding’ (DSO) KPI? This is not always measured in Shared Services but of great concern to the Controller and CFO. There are many, but some good examples include:

Lack of agreed terms or no terms defined
Mismatch between agreed/expected terms and/or customer master data
Lack of credit checks vs. outstanding credit balance
Mismatch between our sales process and customers purchasing process (missing a PO for example)
Lack of confirmation of delivery, receipt, acceptance by customer
Invoicing the requestor or goods recipient rather than the accounts payable centre
Billing errors due to missing or incomplete customer data
Late invoicing and late or missing reminders
Lack of sharp follow-up as invoices become due
Lack of escalation process in case of dispute or customer communication issues

Finance executives at one firm were alerted to a massive 16% of sales orders subject to late changes, which drove excessive value-sapping effort as well as created a receivables problem damaging DSO targets. 3% of sales orders were subject to changes to payment terms after the fact, also damaging DSO.

In these examples, clear and precise information on the nature of these exceptions and the management of the KEIs enabled management to diagnose the root causes and implement changes to processes, policies and training to eliminate wasteful effort and reduce costs and cycle time.

Better information leads to better decisions, and nowhere is this clearer than in business exceptions and continuous improvement.

Shared Services is evolving through 3 main waves:

1. The beginning: transactional
consolidation
Optimisation: focus on process and
systems standardisation
Business Value: drive for continuous
improvement in support of the business
From Cost Reduction to Added Value
There has long been an argument that finance transformation and shared services as a tool are more than just efficiency drivers for the finance function. Advocates refer to their role in re-shaping broader business strategy and changing the role of finance.

However, caution suggests that perhaps the current levels of achieved cost reduction are not sufficient to justify the substantial capital investments in these major transformation programs. There is a substantial industry that needs to justify itself. Is this a case of changing the measures to justify an existing strategy? Either way, we know the efficiency drive must continue and greater standardisation in Shared Services provides a great catalyst for improvement across the end to end process.

Some organisations are moving from an Accounting Shared Services focus to an Accounting & Control Shared Service Centre model i.e. increasing the mandate to more Controls and Audit including providing Key Performance Indicator (KPI) and Key Risk Indicator (KRI) capabilities and tools to monitor end-to end processes. These organisations are moving away from ‘pure accounting (factory) processing’ to include responsibility for end-to-end process and control governance and monitoring.

Continuous Improvement is the new wave

As the big bang transformation programs complete, continuous improvement is becoming the common agenda. Organisations are building structures, responsibility and accountability for global process leadership and the new focus is the end to end process that spans the business functions of sales and purchasing through the SSC and back around.

New processes and technologies are emerging here to support this. The KEI concept and a systematic methodology to identify, address and resolve business exceptions is key. It may be that the payoff for the grand transformation programs whilst not yet fully materialised is driving business leaders to look for new areas of benefit through continuous improvement.

From Accounting Shared Services to Global Business Services

Many companies are broadening their vision of shared services to encompass all general business services such as HR, IT, Procurement as well as accounting. There is no clear best practice emerging yet, but if you accept the economies of scale and strategic flexibility/scalability arguments, then this seems a logical next step. However, it is still early days in assessing the true cost and value…

This evolution challenges the organisation on the model it wishes to adopt. Much of the third wave is about deeper integration of shared service culture and operation into the business, and thus the balance of internal shared service capability and organisation as opposed to external shared services and process outsourcing.

But some big questions continue to be asked…

As businesses continue to seek operating efficiency, how do we drive further savings?
What is the optimal role for shared services and how do we maximise their value?
What is the mechanism to drive continuous improvement and how do we define KEIs and use data analytics to identify and manage exceptions?
Who is going to lead the third wave? The CFO, Shared Services, Business Management, Continuous Improvement Specialists? Dedicated teams or a joint effort? One thing is for sure, it will be far less IT intensive than the first two waves. Process understanding is the key.

These questions all revolve around this issue of continuous improvement. The key is the continual drive for simplification and standardisation, not just at the big picture level but down at the detail of process execution. What are the best practices? How do we get the information on exceptions to start diagnosis? Which KEIs should we start with? How do we benchmark variances to the operating standard by region?

Tools and techniques exist. There are now low cost non-disruptive ways to capture and analyse these KEIs and the process performance exception data, on a one- off assessment basis or on a continuous basis as part of ‘business as usual’. The first step is to perform an assessment on a key process for one or two key areas of the business to start the process of diagnosis and action planning.

However you define ‘finance transformation’, it is generally agreed that that it targets cost reduction, efficiency and effectiveness, flexibility, scalability (agility for expansion), accelerating new market entry, easier assimilation of M&A activities and greater operational visibility. That visibility needs to extend into performance norms and exceptions so that we can genuinely drive continuous improvement.

By identifying and monitoring the leading indicators of “bad” things happening in our core processes we are better placed to diagnose, take action and continuously improve. If we can broaden our knowledge of these approaches and options, start simply, iterate and drive rapid value, perhaps we can tackle this particular ‘elephant in the room’, making the Third Wave a real breakthrough.

About the Author

Dan French is CEO of Consider Solutions, a firm that provides business solutions and consulting services to help organisations on the journey to World Class Finance. The firm applies management advisory and technology capabilities focused on finance process optimisation, risk management and reducing the cost of compliance, control and assurance. Consider Solutions’ methodologies deliver rapid, cost-effective results whilst providing the flexibility required by business management.
Dan has run the firm for 12 years and has a background of 25 years in general management, performance improvement, process change and technology. Dan advises organisations in Europe, US and Asia on strategies for continuous monitoring and exception analytics. Dan claims to live in London despite his travel schedule. He can occasionally be observed playing blues guitar or sampling fine red wines, but rarely at the same time for reasons of practicality rather than preference.

Dan can be contacted at dfrench@consider.biz

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Driving Continuous Improvement: “The Aggregation of Marginal Gains”