Metric loss

The cost of a shared service center

Imagine a chain of grocery stores with many stores across the country. Every store needs someone to process payroll, pay vendors, and perform other key financial processes. Rather than hiring accounts payable or payroll staff at each store, the company will likely be one of a growing number of organizations choosing to move these and other common processes to a shared service center. (SSC).

SSCs provide a centralized team that executes high-volume, repeatable financial processes on behalf of a company’s business units. Organizations typically choose this model to achieve:

  • Standardization and improvement of processes

  • Improved financial results

  • Reduced errors

  • Reduced labor costs

  • Reduced office space footprints

Perry D. Wiggins

Not all SSCs are created equal. Some operate much more productively and efficiently than others. Considered alongside other SSC performance metrics, the total cost of operating an SSC gives CFOs a good idea of ​​whether SSC expenditures are producing the efficiencies that organizations expect.

APQC data for this metric shows that organizations in the 25th percentile (top performers) spend $1.90 for every $1,000 in revenue to operate their SSCs. That’s half of what organizations at the median level spend and less than a third of what organizations at the 75th percentile spend.

A 75th percentile organization with $1 billion in revenue can save nearly $3 million just by moving to the middle percentile for this metric.

At the same time, it should also be noted that there is a time when cutting costs becomes counterproductive. A company might aim to spend just a penny for every $1,000 of revenue on its SSC, but it might fail that.

Without more data, we also can’t say that all 75th percentile companies are doing something wrong or underperforming. A company might have launched its SSC or invested in systems that will eventually bring greater efficiency and lower operating costs.

The performance of this metric needs to be balanced with other metrics, such as key process cycle times, number of employees needed to run the processes, and first contact resolution rates. This helps organizations see if they are spending or saving in a way that ultimately benefits the business.

Lower the costs

Our SSC benchmarking research (sponsored by ScottMadden and administered by APQC) reveals that the most successful SSCs have standardized and well-documented processes, effective and integrated systems, well-trained staff and accountability. The differences between top performing SSCs and a comparison group are most pronounced in transactional processes such as invoicing and general ledger, where top performers are more than twice as efficient.

For example, in top-performing SSCs, it takes 4.1 full-time equivalent (FTE) employees per $1 billion in revenue to bill customers, while the comparator group uses 11.3 FTE. We also found that the most successful SSCs share the following characteristics:

  • Claims handled by dedicated finance staff, resulting in higher first contact resolution rates

  • Increased use of technology, including heavy investments in supplier portals, enterprise resource planning systems, and robotic process automation

  • Better adoption of end-to-end processes

  • Global process governance, global process owners, and increased use of service level agreements

If your SSC costs are higher than you think, look for opportunities to improve processes and process management. Automating high-volume transactional processes wherever possible, for example, avoids the types of mistakes and errors that can easily ripple throughout the entire organization. Reducing variations or exceptions to processes is another interesting improvement. If an exception becomes the rule and a process has to be done differently for each customer, the business loses the benefits of shared services.

Good structures, practices, and technologies help reduce the costs of running an SSC, but they have an upfront expense. As the company invests in improvements, the cost of SSC may increase temporarily, but it will decrease over time as finances realize greater efficiency.

Perry D. Wiggins, CPA, is Chief Financial Officer, Secretary and Treasurer of APQCa nonprofit benchmarking and best practices research organization based in Houston.