Centralization and Shared Service Centers
Many multinationals that reach the $250 million to $500 million revenue threshold find that their operations have become quite complex. Some begin to consider shared service center (SSC) solutions to attain the benefits of process standardization and rationalization for their financial functions.
Today, however, companies may be able to gain these same benefits by centralizing common treasury functions within one bank or a few key banks, which eliminates the costs and challenges associated with setting up an SSC.
Advances in technology, increased global reach of major banks and key regulatory changes make centralization a viable option or even a necessity for global companies today. Sarbanes-Oxley (SOX) global governance provisions imposed stricter requirements for companies to maintain adequate policies and controls related to bank account management. Meanwhile the Single European Payments Area (SEPA) created a regulatory framework for a unified pan-European clearing network. All of this could be good news for the many companies whose cost-benefit analyses have led them to conclude that establishing an SSC is not a suitable solution.
The most common corporate functions brought into SSCs include finance and treasury functions, such as accounts payable, accounts receivable and bank account management, while less common functions also include human resources, travel and entertainment management and tax reporting.
The primary reason for establishing an SSC is to standardize disparate processes and reduce costs. Disparities in financial processes naturally arise as companies expand globally, either organically or by acquisition. For example, an organization may need to rationalize how an acquired unit in London handles accounts payables versus how its Brazilian subsidiary or headquarters performs the same function with different banking partners, typically resulting in higher costs.
Reducing duplication of effort is an initial benefit of an SSC. Eventually companies may also realize cost savings by attaining critical mass and economies of scale that allow them to consolidate transactions and leverage relationships with their vendors (including banks) to reduce the number of transactions and fees.
Nonetheless, successfully implementing an SSC implies a significant time and resource commitment and may require business reengineering, a fully integrated enterprise resource planning (ERP) system across the organization and highly skilled staff—while bank centralization may simply require a strong banking partner, with a matching global footprint and a comprehensive suite of cash management products and services.
Standardization Through Centralization
Companies may also gain the benefits described above by centralizing treasury functions within one or a few banking institutions. For example, if a firm faces disparate ways of handling overseas payments, one option is to consolidate with one bank. This allows the firm to implement a standard process or create similar payment templates or file uploads for payments in any country. By using one consistent banking platform, it can standardize its data files for transaction initiation and reporting.
Similarly, centralizing with one bank gives companies the same tools for accounts receivable reconciliation and cash application, whether they are transacting in the U.S., India or another country.
Other benefits include better visibility into cash balances and more efficient working capital management. By working with one banking platform, a company can see consolidated balances with that particular bank or even with other banks through multibank reporting. Having the right banking partner can also help companies improve their working capital. Banks can offer companies advice and provide tools to help them shorten the cash conversion cycle or enhance liquidity without significantly disrupting their day-to-day operations, as setting up an SSC potentially would require.
What About Counterparty Risk?
For some, managing counterparty risk may be a concern when centralizing functions with one bank. However, the enhanced control and visibility gained through bank consolidation provides a strong counterargument. Once a firm gains better visibility into its cash balances through one banking platform, it can be far more certain of where its excess balances are, how it's investing these balances and where it could redeploy them more effectively. Additionally, it's worth considering that fully leveraging the benefits of technology—the ability to deliver one payment file for all global payments, for example—may require consolidating payment instructions through one bank.
A company sees maximum efficiency gains when it can integrate its ERP system directly with the bank's back office through a host-to-host connection. However, for companies concerned about being tied to a particular bank, SWIFT for Corporates may also be an option.
Critical Success Factors For Centralization
If we think of centralized versus decentralized companies, it's clear that they exist along a continuum. How much they move along this continuum and consequently benefit from more centralization depends on a number of characteristics.
Certain industries lend themselves to centralization and bank consolidation, including high-tech or service industries with electronic payments and collections. Companies in retail sectors that require various in-country cash and coin collections points are less likely to be able to consolidate their banking to one provider. Also, companies that must maintain a strong connection to local markets or to highly specialized localized skills that cannot be centralized or standardized tend to find centralization less beneficial.
A high degree of senior management buy-in is critical to the success of either an SSC or centralizing any treasury or finance function. In fact, the most critical factor is senior management sponsorship. Normally, SSCs report up to chief financial officer level, so senior management must strongly embrace the project. Indeed all stakeholders must enthusiastically support the SSC project for it to succeed, and the same holds true for centralization.
An Evolutionary Process
Companies must manage their expectations about the phases a centralizing project must necessarily go through. There is a real evolution, and in the earliest stages, the process is all about consolidating accounts and simplifying processes. In fact, companies may never get to one single banking provider, so they should also be realistic about what they can achieve, and in what time frame, to avoid frustration and project fatigue.
After bank consolidation, companies should work toward standardizing and improving processes with their remaining banking partners. After completing this step, the company will likely be able to use the information and knowledge available to implement best practices and move to the final phase of continually improving processes and creating centers of excellence.
Finally, there is the question of time commitment. An SSC typically requires a two- to three-year commitment for the project to be fully implemented, depending on the size and complexity of the organization, as well as a significant investment in companywide systems. Companies could significantly reduce this time frame in a bank consolidation exercise, which is why they should not overlook this option.
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