Interest grows in combining
varied financial operations

These days, companies with multiple business units are increasingly consolidating accounts receivable, accounts payable, and other financial functions such as payroll and procurement into one operation in a single location, instead of each business unit handling its own. Although some companies have been using this “shared services” approach for decades, experts have noticed a renewed sense of interest in it.

In fact, research by Miami-based strategic advisory firm The Hackett Group shows a 50 percent increase in the use of shared services centers over the past three years. Those that consolidate a number of functions offer the greatest opportunity for efficient, effective delivery of services, industry leaders say.

“We’re seeing a significant focus on shared services now more than ever,” says Susan Hogan, principal and leader of the shared services practice with global consulting and financial advisory firm Deloitte. In the firm’s 2009 Global Shared Services Survey, 82 percent of respondents said they’re adding processes to the functions their shared services centers handle – going from just handling vendor payments, for instance, to also negotiating contracts with suppliers.

What’s behind the increased activity? The answer may lie in what sets shared services apart from simple centralization. Differences include service-level agreements with customers – those business units that would otherwise all be handling their own AR, AP, and other functions – and a continual focus on streamlining processes and reducing costs, says Jim Arnold, president of APEX Analytix, an audit technology and services provider based in Greensboro, N.C.

“The centers should be competitive with the outside world,” Arnold says.

The sputtering economy also is coming into play, says Henry Ijams, managing director with consulting firm PayStream Advisors, based in Charlotte, N.C. By consolidating functions, a shared service approach offers the opportunity to improve processes and cut expenses, both of which have become more critical as companies see fewer sales.

Making the transition

Even though a shared services approach makes sense for many companies, that doesn’t mean implementing the concept is easy. Gaining employee acceptance often requires work.

“There are perceived winners and losers with shared services, and the losers will make lots of noise,” Deloitte’s Hogan says. The “losers” aren’t just those who may lose their jobs, although they obviously are a key part. Individuals who worry that their influence or power base is eroding – such as an accounts receivable manager whose staff is moving to a shared service center – also may fight the move.

That’s not to suggest that the team charged with managing the transition to a shared services approach should begin tentatively, or convey the impression that the initiative lacks support from the top. Quite the opposite, Ijams says. You want to “go bold,” he says. “The C-suite needs to say, ‘This is what we’re doing and here’s why.’”

Although it may sound trite, communication is key. “Build your vision and repeat it often,” says Penny Weller, Ph.D., shared services advisory program leader with The Hackett Group. Employees need to be kept in the loop as much as possible, and know how the changes can benefit both them and the company.

You also want to maintain an ongoing dialogue with the areas that will be served by the shared services center, Weller says. Most bumps come early in the process, and some people will be waiting for the initiative to fail. You don’t want to give them a reason to say “I told you so.” To avoid that, you need individuals who can adeptly manage any early missteps and maintain relationships with the customers.

Wal-Mart Stores Inc. made communication a priority as the $400 billion retailer started rolling out a shared services approach for finance about three years ago, says Kathy Schroeder, director of receipts. The 900-some associates working in the shared services center at the company’s headquarters in Bentonville, Ark., process about 130 million invoices and 360 million receipts each year. Other functions housed within the center include payroll, reimbursements of travel and entertainment expenses, record retention, and document imaging.

Wal-Mart’s shared services center comprises six “centers of excellence” that adopt best practices and continually strive to improve operations in receipts, internal disbursements, support, general accounting, controls, and external disbursements.

One reason for the shared services initiative was the desire to get to “one version of the truth,” says Teri Naylor, manager of external disbursements. By bringing responsibility for processing transactions into one area, the company could gain an overall view of just how and when it was receiving and disbursing money.

Another driver was a desire to use employee hours more effectively. Associates within the shared services center can move from one function, such as processing travel and expense transactions, to another as needed. Meanwhile, a satellite center in Derby, Kan., handles third-party transactions, such as insurance and pharmacy payments.

As a result, the shared services center has been able to cut the cost of processing transactions. Operating expenses for the year that ended in January 2009 were about 7 percent below the level of the previous year. What’s more, the decline occurred even as many associates received wage increases.

The previous processes had been in place for a quarter-century, so the shift meant changing some longstanding habits, Schroeder says. To start, the transition team described to associates the reasoning behind the move and the goals of the program, such as reducing costs and enhancing control. Because many associates were understandably concerned about the potential impact on their careers, the team also let them know advancement opportunities actually would be broader than they had been under the previous structure, because employees were gaining exposure to a number of different areas. In fact, from mid-2007 to mid-2008, more than 100 promotions occurred within the division.

In addition, the team managing the transition launched a weekly newsletter to associates that highlighted new initiatives, as well as recent hires and promotions. This team also expanded committee participation to include hourly associates. The move helped associates better identify with the new organization, and showed that all levels of associates would be involved in the change.

A modified approach

Even though many companies are moving to an “all-in-one” approach, some companies find it makes sense to adopt the concept of shared services, but to keep different major functions physically separate.

That’s the case with AT&T. The $124 billion-dollar telecommunications giant uses a shared services center approach for both accounts receivable and accounts payable, says Taylor McMullin, the company’s director of accounts payable shared services. His department of 200-some employees, most of whom are based in St. Louis, Mo., electronically processes about 16 million invoices a year for AT&T’s worldwide operations and also handles other functions, such as check printing and distribution.

In addition, the treasury and cash management function within corporate finance centrally manages the cash flow activities that result from the company’s AR and AP activities, McMullin says. For instance, the department provides centralized financing to support the net position of business units and invest any excess cash.

However, the AR and AP shared services centers are not physically located together. For one thing, because AT&T operates in just about every part of the country, AR collection activities take place in several regional shared services centers, McMullin says. These locations came about as the company consolidated the processing units it picked up through its many acquisitions. Because of the company’s size, even the regional centers are large groups in their own right. The fact that each unit has made significant investments in technology deters further consolidation. Even so, the AR and AP groups operate similarly, share information, and work together on various initiatives.

The ability to share resources and people prompted the company’s move to a shared services approach for payroll and sales commission processing, as well as accounts receivable and accounts payable, McMullin says. “When you have functions that are common to various groups, and you put them in one place, you typically can better use your headcount.”

For instance, employees within McMullin’s group are trained to handle, among other tasks, T&E reimbursements to employees, as well as the processing of purchasing card transactions. Because the staff is cross-trained, employees can efficiently handle a considerable volume of work.

Several steps have been key to making this work, he says. One is ensuring that all processes related to a specific function are housed within the shared services center. For example, accounts payable handles the vendor master file, oversees the purchasing card and T&E programs, and resolves accounting corrections, among other duties. If these tasks were spread across the company, possible cost savings would be diluted because it would be more difficult to shift work between teams. With a shared services approach, employees can move from one function to another as the volume of work in different areas fluctuates.

The same holds true on the accounts receivable side, says Jerry McKay, director of treasury operations with AT&T in Dallas. AT&T currently processes about 70 million payments each month, which are about evenly split between paper and electronic transactions. Because the company wants to get payments from its customers into its bank accounts as quickly as possible, it maintains several lockboxes in different areas of the country, including California, Georgia, Illinois, and Texas.

AT&T previously also had different kinds of payments sent to individual lockboxes – specific places where payments of a certain type are received so they can be deposited quickly instead of sorted with other mail. For instance, payments for wired services went to one location and those for wireless services went to another.

“That begins to change as you move to a shared services approach,” McKay says. For example, employees now working with the remittances that come in through the company’s internal lockbox can handle a variety of payments. In addition to accounts receivable, McKay’s group handles cash controls and reconciliation and error corrections. It also manages the IT systems that the AR department uses.

“While not 100 percent of employees can handle 100 percent of the work, the number is growing every day,” McKay says.

Making it work

For a shared services center to be successful, it’s necessary to stymie any “shadow organizations” or groups of employees that remain in place, even as their work moves to the shared services center, says Weller of The Hackett Group.

A shadow organization could consist of employees in a business unit that retain copies of invoices and continue working with vendors, rather than encouraging them to use the shared services center. Their presence undermines the initiative and reduces potential benefits because they duplicate the work being done in the shared services center. Moreover, if some work remains outside the center, it becomes difficult to accurately track its performance.

That said, it can make sense to keep talented people in place, wherever they may be, even with a shared services approach, says McKay of AT&T. So, even though AT&T takes a shared services approach with its accounts receivable function, the company has several talented individuals who joined the company via its acquisitions and are working remotely. For instance, one is adept at training AR employees, while another is an expert at using technology to streamline AR processes. “Even if it’s not always convenient, it’s more important to hang onto talent.”

Moving to a common technology platform also has been important, McMullin of AT&T says. While this can be a challenge, given that AT&T often has grown by acquisitions, the company continues to head in this direction. Currently, all its North American operations are on a common financial platform.

On the AR side, McKay’s organization currently supports more than 100 different “billers,” or systems that generate bills. She and her colleagues are trying to consolidate these systems, which largely are a result of the mergers that AT&T has completed, as well as the various product lines the company offers. For instance, the calculations for a bill for wireless services will differ from that for data services.

Traditionally, each product line would have its own bank account. That’s no longer necessary. “We don’t silo dollars, and say that ‘this is telco money and this is wireless,’” McKay says. “It’s all just AT&T money.”

To manage the different billers under a shared services approach, AT&T employs a gateway, or technology that automatically determines which payments should flow to which billers, and distributes the money to the appropriate subsidiary or product line. This is more efficient for AT&T, and makes life easier for customers, who can send AT&T one check that covers various services.

When dealing with customers who have questions on their bills, AT&T’s philosophy is to use customer service representatives to work with them, rather than back office employees who may not be aware of the broader range of issues customers can have. At the same time, the company continually is enhancing its online self-help tools.

As AT&T has done when integrating smaller companies it has acquired, it makes sense to take a “stepping-stone approach” when implementing a shared service center, Hogan says. Companies usually are most successful when they set up a shared services center within a geographic area or business function, like AR. They need to give it time to achieve some successes. Once that occurs, the approach can be expanded to other areas.

Better cash flow management

Another benefit that’s possible with a shared services environment is improved management of cash flow. That’s key during periods like now, when external financing is hard to come by.

“Control over cash is huge, and something organizations often don’t appreciate until they’ve been on a shared services arrangement for a while,” says Brian Rosenberg, senior partner with RPI Consultants, a Baltimore-based procure-to-pay optimization firm. For instance, with a shared services approach in accounts receivable, management can gain an enterprise-level view of the customers that are dragging out payments. If each business unit handles its own accounts receivable, a customer that hasn’t paid its bills to one unit may start ordering from another, and neither side is likely to be the wiser.

Compliance and control often get a boost as well. More than half (57 percent) of respondents to the 2009 Global Shared Services Survey by Deloitte indicated that their shared services center had had a significant or somewhat positive impact on compliance with Sarbanes-Oxley. That’s because processes usually are more highly automated, and it’s easier to segregate duties.

At AT&T, the gateway through which all payments flow provides control over the money from the moment it’s received until it’s posted to the customer’s account. Once a payment is in the system, the gateway knows where it’s located at any point during the process. Effectively deploying the gateway and getting more payments to flow through it remains a work in process, McKay says.

That’s often the case for shared services in general, Deloitte’s Hogan says.

“Shared services is a journey,” she says. “Once you head down that path, it never really ends.”

A version of this article appeared in AP Matters magazine in June/July 2009.

Karen Kroll is a Twin Cities-based business and financial writer and blogger. Among the topics she has tackled are transparency in health-care costs, changing 401(k) plans, avoiding layoffs, and hedging foreign exchange exposure. Her work has appeared in American Way, Bankrate.com, Business Finance, CFO and many other publications. She earned an MBA from the University of Washington and a bachelor’s in business administration from Valparaiso University.