I just posted a discussion of Total Cost of Ownership and here is another example of its power. I’ve underlined the relevant paragraph below. I also like his discussion on “nonsensical behavior” in the second to last response (“quality indicator”). How often have we seen that!! Process for the sake of process without regard for the actual total cots to the business. Ugh, I’m getting flashbacks….
Evolution of Solvay Shared Services; Recognizing ‘total cost’ as a real factor
Reengineering before shared services implementation pays off. Interview with Guy MERCIER, Managing Director, Solvay Shared Services
Guy Mercier is managing director of Solvay Shared Services — 3S — having previously held a number of senior financial roles within the Solvay. As head of 3S, he has spearheaded not only top-ranking results, but also a renewed definition of what cost means to the shared services group, and to the business as a whole. Here, he speaks with SSON’s Barbara Hodge, offering a glimpse of what he’ll be sharing with delegates at the Shared Services Exchange in the Netherlands, 6-8th December 2009.
SSON: Mr. Mercier, thank you for taking some time to speak with us. To start, would you explain how 3S came to be?
GM: Gladly. Let me begin by explaining our set-up to you. Solvay’s organization consists of three types of units: First, we have the traditional strategic business unit, which includes everything related to sales, production, and logistics. Second, we have what we call ‘competence centers’ relating to expertise which Solvay would like to retain inhouse. These specialize in strategy, policy, market surveillance, R&D, process design, etc. Third, all that remains, ie, that which is not directly related to the business or at the level of expertise of competence centers, is classified ‘business support center.’
These BSCs originally included IT, HR, finance, and procurement. The idea was that if the processes were not exclusively dedicated to one business, then they were more transversal. And it was in this area that we launched our re-engineering project, which we called ‘shape 3S,’ five years ago.
Shape 3S was the process by which we moved towards what is today ‘3S’ – namely Solvay Shared Services. We wanted to optimize certain processes by redesigning them, and including the concept of a single support center. That is where we are now: 3S today runs finance and HR services for the Solvay group mainly in Europe for Chemical & Plastics sector and globally for Pharmaceuticals.
SSON: So, what determined which processes went into 3S and which stayed in the BSCs?
GM: A good question. Not everything is a good fit for 3S. Using the traditional criteria of what was ‘ transactional and repetitive,’ we qualified certain activities as suitable for 3S based on scale and maturity of the process targeted, but determined that other activities needed to remain closer to the business, as they were too country specific, and so these processes stayed in the local business support centers.
To explain this, I really need to go back 10 years, when the Solvay group went through a strategic realignment. The result of this was that the group was divided into a) ‘market- and product-oriented businesses ‘ b) ‘expertise-oriented businesses’ and c) ‘support businesses.’ Hence, the group emerged as business units, competence centers and business support centers.
The concept of shared services actually emerged under the leadership of Finance, which was already well-matured, mainly because of the advanced migration of SAP. Leveraging the SAP platform, the CFO at the time recognized an opportunity to redesign many of the financial processes, which were being run from the business support centers, and arrange them into either transactional,’ meaning repetitive; or ‘specific’ processes — whereby specific could relate to business-specific or country-specific. If the work was deemed ‘specific,’ it was out of the scope of ‘shape 3S.’
We dedicated 50 of our financial experts and local accountants to this project, who were supported by three consultants. They spent almost two years untangling and redesigning our financial processes. By the time they had finished, we had gained some real competitive advantages through this approach, far beyond what might have been gained through just SAP optimization — ie jumping straight into shared services. Using ‘shape 3S’ as a driver, our strategic approach was to re-engineer first before migrating processes to the 3S SSC.
SSON: And what are the results you’ve been able to achieve through 3S?
GM: ‘Shape 3S’ proved to us that there were tremendous synergies to be gained — not just in terms of process efficiency but also in terms of cost effectiveness — by running the transactional elements into a shared services organization. So that is what we did in 2005.
Two years after full 3S deployment, so that brings us to 2007-2008, we achieved fantastic levels of optimization in SAP. For example, through tools like ‘schedule manager’ we’ve been able to gain two days in closing the books — moving from D+7 to D+5. And now we are dreaming of D+3!
So, as far as Finance goes, 3S is a real success — weve achieved more than 43% savings, and we’ve migrated 95% of AP processes to 3S. The remaining 5% will remain local, in BSCs, for now because of the procurement element. Procurement, right now, is still considered too specific to the local business to centralize. We’ll need to move to e-procurement and e-invoicing to gain additional optimization in this area.
In terms of closing the books: we’ve migrated 50-60% to 3S. In fact, we want to keep 40% local, because we want each finance manager to remain the owner of the books – ie, 3S won’t be doing statutory accounts.
SSON: So you have opted to drive 3S geographically instead of widening your scope, is that right?
GM: Yes, absolutely. While other shared services centers choose to go broader in service scope, but not as deep in terms of geographical expansion, we chose to limit ourselves to transactional processes, but delve deeper into geography. I believe the big savings are gained in the redundancy of the transactional element.
SSON: It sounds as if much of what you’re achieving with 3S is based on years of preliminary work. I mean that you spent a lot of time analyzing and re-engineering before moving to a shared services environment. And it seems the results are more powerful for this?
GM: I would agree. Here is an example. In AR, right now, I believe our center is among the best in the world. However, this is based on some work with cash collections, which we started 15 years ago. At that time, so well before 3S or Shape 3S, we implemented a factoring center called CICC — Commercial International Cash & Credit — which I headed at the time. We collected all receivables from all Solvay affiliates world-wide, and paid back the amount on the next day, in the local currency and at a discounted rate. As a result of this, we managed all treasury activity, all invoices, and all collections.
Today, in 3S, we are doing all the cash reconciliations for that center. I am proud of our results: on a monthly turnover of 400m Euros, we have, on average, less than 200,000 Euros unreconciled, after 48 hours. That is an excellent result, I think anyone would agree, and it is the result of many years’ progress in SAP.
But underlying these results are a few things. First, we have Solvay Commercial International, an affiliate that delivers electronic invoices to customers. They own the delivery, the logistics and the order transfer, and manage the inventory globally for most of the products. On top of electronic invoicing, we have assignment of receivables to a factoring center; and on top of that we have an integrated SSC, using state-of-the-art SAP for automatic reconciliation, and bank file transfers being done overnight.
SSON: So what is the true value of 3S to Solvay today? How do you measure it — in cost savings?
GM: What I’ve just described are competitive values. Beyond that, cost reduction is a consequence of how you work. It does not need to be the only driver. If you make cost the driver, you’ll miss out on opportunities to invest in breakthrough competitive advantage, quality management and continuous improvement to move to another level of competitiveness not just in cost but also in quality and reliability.
Most SSCs are still looking at reducing primary cost. They are using enough value creation to generate long-term savings. But the challenge we have is that in these SSC markets, the businesses aren’t buying long-term value these days — rather, they prefer short term ‘cash savings;’and I understand them. We have to keep the right balance because, after all, we in shared services are in it for the long run, too.
I prefer to work on the concept of total cost. It’s a well-known concept but not always well-used! The idea is that you measure, from the shared services perspective, the total cost of running transactions end to end. It’s almost akin to a business transaction, if you think about it: You buy, sell, deliver, produce, collect money, reconcile etc. You have to see it from the concept of macro-process versus data processing.
Most people are focused only on the unit cost of processing a transaction. This is not the same thing. You can indeed make the artificial argument that you can drive the cost per transaction down to almost zero if you only take into account the incremental cost to process a transaction in a shared services center. Because it’s true that you need only a couple of seconds, at full automation, on a computer so well-depreciated or outsourced that you cannot even put a number on it. So, the absolute target for processing transaction could become close to zero. Today, the best in class are close to, or below, $1/invoice processed — but with full e-procurement, e-invoicing and automatic matching by the computer. What about the other, indirect costs generated in the business to arrive here?
Does that mean that we will all have to achieve a zero cost level? No! Total cost includes the physical as well as the intangible, digital part of running the business — direct and indirect costs. Optimizing the digital part simply means running your transactions. But you need to add to this the cost of reporting, of measuring efficiency, of optimizing processes, fixing exceptions; etc. Add to that some qualitative subjective elements, namely ‘responsiveness’ and the ‘quality indicator’ — and you have the indirect cost of running your shared services business, too.
SSON: What do you mean by ‘quality indicator?’
GM: To understand that, let’s look at the ‘non-quality’ indicator, which is important. It drives perceived non-quality for our customer (the opposite of ease of use and full reliability). As much as we measure quality ratings and achieve high percentage scores on our KPIs, etc, a ‘perceived non-quality’ does sometimes remain with the business when they work with our SSC. This perception stems from: exceptions which are difficult to manage; unnecessary or redundant questions sent back; desperate searches for urgent payment solutions; or simply too many tickets going back and forth. This represents a cost. It results in lower customer satisfaction, even pain, but also in real money to the business. It means for example that, ‘yes, you pay the invoice on time; but if it requires three calls, tickets or questions, the business will perceive your service at a good price, true, but at lesser quality — generating higher indirect costs for them which you may not be aware of.’ And this, despite the fact that you are hitting your well-known KPIs.
Think about it: shared services enjoy the best reputation when no-one hears any complaints, right? That means the level of perceived non-quality is right at the tolerance level, and is not worth raising.
Another thing to bear in mind, in terms of ‘cost to the business,’ is that standardization is great — but we are pushing it, sometimes selfishly, to the limit of the absurd. Take, for example, ordering material — say a book — online. Do we really want to take a Chemical PhD engineer in a research center off his or her job for half a day’s training, just so that they can enter a purchase order to buy their own books online? Is that a good use of their time? No! Think about what it costs the business. It’s a huge cost!
At the root of this phenomena is standardization pushed to the extreme — by universal rules like the requirement for a three way match, in a perfect world: you need to pay to have a purchase order equal to the invoice equal to goods receipt in all terms. But everybody knows that the business world is not that perfect, because it needs some natural flexibility to adapt quickly to market conditions.
Pushing desperately for this standardj forces the kind of nonsensical behavior I’ve just described. Focusing on perceived ‘non-quality’ issues helps you change such behaviors. At Solvay, I’ve proposed to introduce new rules for small value purchased items: under 1000 Euros [about US$1,460], we skip the ‘goods receipt’ part of the match. I pay automatically based on e-procurement, knowing full well that if the ordered item is not delivered, someone from that department will raise a complaint or the alarm. So we wait and make the correction when the need arises, instead of trying to control all goods receipt. This is far more cost-effective for the business.
SSON: Many people are talking about increased partnering with the business units and making costs more transparent. It shifts some of the focus from just shared services to operating as part of the whole, right?
GM: Sure. At the end of the day, competitive advantage is based on the total cost of running the transaction which is only a part of the cost to run the business. We need to remember that we serve the business. So we have to partner with the business in lowering its total cost – not only our SSC operating cost. That is a crucial differentiator for SSC, whether in-house or outsourced — to be considered as a real business partner. I think that is only just beginning to be understood.
SSON: Mr. Mercier – thank you so much for taking the time to outline your work with 3S for us.
Guy Mercier will be speaking at the Shared Services Exchange in The Hague, Netherlands, in December 2009.