Challenges and payoffs in using shared services

1. OUTSOURCING
INSIGHTS
W H I T E PA P E R
Cha llenges and Payoffs in using Shared Service
Centers for Financia l Transa ction Processi ng
For more information, please contact Ramesh Krish at 917-971-9701
ramesh_krishus@yahoo.com

2. Executive Summary
There has been an increased focus on outsourcing over the last few years. As companies try to show improved
bottom lines with little top line growth, cost cutting while optimizing operations by outsourcing functions has
become very prevalent. However the complexity around outsourcing decisions is increasing, with the advent of
new service providers, financial terms and operating models. In addition, the probability of failure due to
insufficient upfront analysis is increasing.
The Adya Team helps organizations find answers to questions about outsourcing that match their unique
requirements:
Is outsourcing appropriate for me? What functions, processes or departments do I outsource and
what potential benefits (cost effectiveness, improved quality, increased flexibility, risk mitigation) can I
expect?
Who are my ideal outsourcing partners? How do I best structure negotiations and broker the most
favorable terms?
How do I implement the chosen outsourced model and guarantee a smooth transition?

3. Outsourcing Advisory Services
The growth in business process outsourcing in various industries has been significant in recent years. However,
there is a high rate of failure, due mainly to poorly analyzed relationships between the concerned parties.
Outsourcing can be a major weapon in the battle to improve efficiencies and reduce costs its benefits are
real and achievable. However, all organizations must examine outsourcing thoroughly and be aware of the
challenges and pitfalls it presents. Problems can arise throughout the outsourcing process. The Adya Team
advises buyers and providers of outsourcing services on the planning, design and management of successful
outsourcing arrangements.
The essential aspects of outsourcing are:
t Performance based services the focus is on the output/outcome of the services with minimal
prescription regarding the basis of delivery or assets to be employed. Performance measurements based
on key performance indicators (KPIs) are a primary tool in assessing suppliers fulfilment of their
responsibilities. Such KPIs must be meaningful, measurable, and readily available and within the
supplier s control.
t Size and duration of contract outsourcing contracts are ongoing; typically covering an initial period of
three to five years with options for further extensions.
t Transfer of assets and resources the transfer of people, equipment or facilities used to provide
services from the customer to the supplier is common and presents many issues regarding valuation,
intellectual property and personnel transitioning.
t Breadth of responsibilities the supplier accepts responsibilities and risk for the activities associated
with the provision of services. However the purchaser is always ultimately accountable for ensure the
specifications are appropriate and the outcomes are suitable for the business needs.
t Styles of relationship – outsourcing agreements typically assume a partnering style of relationship
within expectations set by the service level agreement.
t New skills under outsourcing, the organization s focus shifts from managing inputs to managing
outputs. It becomes a contract manager rather than a resource manager. Skills in the areas of negotiation,
contract law and administration, performance measurement, finance and audits all become critical to
success.
t Flexibility as the organisation s needs change so must the arrangement. Contracts must be adaptable to
changing circumstances and requirements refreshed on a continual basis.

4. Some potential advantages and disadvantages are listed in the table below.
Potential Advantages Potential Disadvantages
Financial
♦ Cost savings through economies of scale. ♦ Unexpected costs – for those that are not explicitly in
the scope of the agreement.
♦ Cash flow relief by supplier buying your assets and
hiring your staff. ♦ Higher per unit of service costs if usage
projections are above or below those agreed.
♦ Predictable costs-either through fixed or usage
based price agreements. ♦ Cost of outsourcing itself planning, investigating,
tendering, implementation and ongoing management.
♦ Costs are known as an invoice is paid for all costs,
avoiding the traps of inappropriate or non-existent ♦ Once off personnel related costs outplacement,
internal cost allocation. remuneration payouts, and union negotiation.
♦ Rebates or liquidating damages for non- ♦ Cost of additional skills and resources required
performance of agreed service levels. managing the relationship.
♦ Potential litigation costs for contract breaches.
♦ Leakage of confidential information resulting in
competitive disadvantage, adverse media, or legal
liability.
Flexibility
♦ Catalyst for organizational change – behavior, ♦ High exit barriers and irreversibility reduced cost-
restructuring, rationalization, etc. effective options if arrangement fails.
♦ Shifting of expenditure from the capital to the ♦ Loss of control over decision-making, resource
operating budget, which is usually less rigid. management, and daily operations.
♦ Remove inflexible work practices mandated ♦ Supplier inflexibility to economically meet changing
by the public sector and unions. requirements on a timely basis.
♦ Access to leading edge, specialized skills. ♦ Exposure to suppliers financial strength and profit
motive.
♦ Shorter lead times to take advantage of new
technology and ideas. ♦ Supply restrictions – locked into a single supply
source.
♦ Economies of scope (the variety of services
able to be produced). ♦ Possibility of being tied to obsolete technology for
supplier to achieve economies of scale.
♦ Access to technology without capital
investment. ♦ Possibility of being forced to upgrade for supplier to
comply with maintenance provision or to gain
operating efficiencies.
Eff iciency and Effectiveness
♦ Predetermined service levels parties are forced ♦ Exposure to suppliers’ lack of commitment – they
to define and agree as to what is expected. may focus their attention on larger or more strategic
customers.
♦ With pay for performance, suppliers are more
responsive to performance complaints if it will ♦ Suppliers are not motivated to improve customer
affect profitability. efficiency, as it will lower their revenue unless they
receive a higher margin.
♦ Centralized support – often there will be one
point of call at the supplier. ♦ Supplier will only meet service levels, not exceed
them, without incentives.
♦ Enables technology catching up or leap-
frogging – if converted to the supplier s state-of- ♦ Loss of in-house expertise – if it is allowed to happen.
the-art infrastructure.
♦ Homogeneous orientated services pay more
♦ Efficiency motivation by converting internal cost if a tailored service is desired.
center to a supplier profit center, however the
supplier tends to receive the cost savings. ♦ Service changes must be negotiated – suppliers have
responsibilities to other customers and must make a
♦ More frugal use of IT resources when paying profit.
real money, users change their behavior.

5. In order to get started, a good first step could be to identify the goals, how outsourcing will fit with this
business strategy, what impact it will have on the employees, how much do current activities cost, and what
benefits can be expected from an outsourcing arrangement.
A thorough approach facilitates the due diligence process to identify the outsourcing objectives and
expectations, and to find the right partner for success.
Strategy Development We take you through the process to determine the outsourcing strategy that
best meets your organizational objectives - Internal, Multi-Sourcing or Selective, Partial, or Full
outsourcing. We review industry trends and comparisons.
Management Structure Define the management and/or governance of the outsourcing agreement.
Identify the internal and external controls that are expected. Identify the organizational changes to support
what is the best structure for interaction with providers and internal customers.
Business Case Review strategic vision, business objectives and performance expectations. Develop
future state vision of the organization and how the value of the outsourced functions will be increased.
Evaluation of Risk Understanding the risk involved with outsourcing improves the success rate.
Identifying risks related to service level expectations will reduce risk exposure over the life of the contract.
Evaluation of Vendors We develop the best method to select an outsourcing provider. Vendors can
be internal or external to the organization. Vendors should have the ability to define relationship
management, how they measure success.
Outsourcing in Financial Services
The wage structure for many organizations is not in synch with the best in class. Large organizations have the
opportunity to reorganize their and corporate support services to provide better support to end customers
while significantly reducing the cost of providing these services.
Many best of class organizations have chosen to use a shared services framework to restructure the delivery of
these services. There are many forms of shared services, however a common theme across all of them is a
reduction in inefficient and unnecessary diversity of systems, processes, locations, and organizations delivering
the same service.
For example, a retail loan processing application in a bank can be outsourced to a shared services center by
clearly identifying the activities, mapping the roles/ profiles and developing appropriate risk mitigating
strategies to deal with process breakdowns. The following example highlights the importance of using detailed
mapping and assessment tools to identify the right outsourcing opportunity for shared services.

6. Legend
P1 is 'Priority 1' Process in which Retail Loan Applications - P1 - As Is
member is to receive funding
within 1 hour System Interface
(CUBE unless noted)
Estimated Time to Completion - 15 minutes
Start Manual Process
Additional time required for:
(in branch)
Auto Loan - 20 minutes
Decision
1 Lending Manager
FSR and member
complete
application
Complete name, product 1
2 type, telephone number, and
FSR accesses additional services sold
Fast Loan (insurance, etc.)
Platform
Prints application 8
(for member FSR faxes
signature) application, cover
sheet, & QA Sheet (if
necessary) to
Consumer Loan
Center
4
3 10
Yes Blue Book ordered
Auto Loan? If fax/queue not 9
online
received the FSR No Fax received
is contacted for by CLC*?
resending Yes
No
6 5 Requires vehicle Go to P1
FSR completes QA Sheet inspection, VIN number, Processing
cover sheet completed etc. for private auto sales
7
Notification
sent to P1
queue
1
*CLC - Consumer Loan Center

7. Legend
P1 is 'Priority 1' Process in which Retail Loan Applications - P1 - To Be
member is to receive funding
within 1 hour Estimated Time to Completion: System Interface
With FSR - 15 minutes (up to step31) (CUBE unless noted)
Member Terminal - 10 minutes (up to step 31)
Additional time required for:
Manual Process
Secured Loan - 2 minutes
Auto Loan - 20 minutes
FSR modification of Member Terminal Activity - varies Decision
Check print in branch (step 33 onward) - 15 minutes
Lending Manager
FSR Start Member Terminal
6
1
Member accesses
FSR accesses
Complete application Fast Loan
Fast Loan
Platform &
Platform
completes loan
Prints application detail
(for member
signature)
7
Member queues
Profile to FSR
2
Individual or Joint
Joint?
8
FSR reviews
Individual Profile
10
Amend Profile
4 3 (Relation Form as
Nonmember Member or Complete Relation necessary)
Nonmember Form
9
5 Profile No
Complete Member complete?
Form as
nonmember
Member Yes
11
Prints application
(for member
signature)
12
Secured Auto
Loan Type?
13 14
Complete Blue Book ordered
Collateral Form Other online
16 Requires vehicle
15
Order & Receive inspection, VIN
QA Sheet
Credit Report number, etc. for
completed
Online private auto sales
Go to pg 2 P1
Decision Tool

8. In a typical banking back office environment as shown below, a detailed analysis of processes needs to be done
to determine the suitability of the appropriate shared services structure.
BANKING BUSINESS FUNCTIONAL MODEL
BANKING BUSINESS FUNCTIONAL MODEL
BACK OFFICE OPERATIONS
BACK OFFICE OPERATIONS
Deposit Operations
Deposit Operations Credit Operations
Credit Operations General Operations
General Operations
Account
Account Account
Account Credit
Credit Correspondent
Correspondent Federal Reserve
Federal Reserve
Origination
Origination Origination
Origination Accounting
Accounting Services
Services Clearing
Clearing
Deposit
Deposit Credit
Credit Credit
Credit Call Center
Call Center Regulatory &
Regulatory &
Acceptance
Acceptance Approval
Approval Release
Release Operations
Operations Compliance
Compliance
Deposit
Deposit Credit
Credit Review &
Review & Billing
Billing Reporting
Reporting
Accounting
Accounting Documentation
Documentation Monitoring
Monitoring
Interest
Interest Cash
Cash
Payment
Payment Management
Management
TECHNOLOGY & COMMUNICATIONS
TECHNOLOGY & COMMUNICATIONS
Software
Software Hardware
Hardware Services
Services Networks
Networks Internal Projects
Internal Projects Security
Security
CORPORATE SERVICES
CORPORATE SERVICES
Finance
Finance Real Estate
Real Estate Human Capital
Human Capital Tax
Tax Other Services
Other Services
§§Accounting § Real Estate § Human Resources
Internal Audit
Internal Audit § Planning § Marketing
Accounting § Real Estate § Human Resources § Planning § Marketing
§§Budgeting & Planning
Budgeting & Planning Management
Management § Benefits
§ Benefits § Tax Returns
§ Tax Returns § Legal Services
§ Legal Services
§§Treasury Management
Treasury Management § Facilities Management
§ Facilities Management § Training
§ Training Regulatory
Regulatory § Tax Accounting
§ Tax Accounting § Inventory
§ Inventory
§§Close & Consolidation
Close & Consolidation § Recruiting
§ Recruiting § Data Retention
§ Data Retention § Procurement
§ Procurement
Reporting
Reporting
§§A/P, A/R, G/L, F/A
A/P, A/R, G/L, F/A § Project Mgmt. Office
§ Project Mgmt. Office
Key
Includes Short, Mid and Long Term Opportunities
Includes Mid and Long Term Opportunities
Analysis must be conducted to determine the most appropriate type of shared services organization for each
business area. Below are the most common types of shared services organizations.
Major Types Description Sample Processes
Handles routine transaction • Procurement
Center of Scale based processes by leveraging • Accounts Payable
Services economies of scale and • Payroll
standardization. • Travel & Expenses
Concentrates expertise to • ERP COEs
Center of Expertise provide high-value services to • Tax/Treasury
Services internal customers at • Benefits
competitive cost. • Legal
Establishes a partner • Internal Consulting
Business Partner relationship between Services
Services organizational units to achieve • Strategy
common goals. • Reengineering
• Government
Provides a structure to support
Corporate Steward central mission critical
Relations
Services • Compliance
objectives.
• Fiduciary

9. Each of these shared services models will have different governance structures. The key elements of
governance structures are explained below:
t MISSION, VISION and CORE VALUES: Provides purpose and vision for the organization. Defines
the ability of the organization to resolve differences in priorities.
t CULTURE: Determines how members of the organization behave toward each other, customers, and
strategic partners.
t ECONOMICS: Defines the approach to resource allocation and priority assessment to map resources
against approved initiatives.
t STRUCTURE and PROCESSES: Determines how the work of the organization is managed, how the
organization is managed, and sets out the key roles that members of the organization will perform.
t CUSTOMER INTERFACE: Defines the nature of the relationships between the organization and its
customers.
t INFRASTRUCTURE: How the organization uses technology, organization design, standard practices
and behaviours to support its management processes and structure.
These different types of shared services organizations do have some common characteristics. These are
described below in a discussion of what shared-services is, and just as importantly what shared services is not.
Shared Services IS:
t Commonized support processes and systems to provide better service to business operations.
t Separate organization providing services focused on customer satisfaction and continuous improvement.
t Re-designed business processes that emphasize value creation and measurement.
t An organizational evolution through which some support processes may be identified as good candidates
for outsourcing.
Shared Services is NOT:
t A move to centralize internal support processes under one roof, operated under a corporate mandate.
t Re-engineering existing support processes without considering the context of the larger business processes
that they support.
t Simple cost reduction measures achieved through process consolidation and FTE elimination.
t An internal push to have all non-core business processes performed by outside service providers.
Outsourcing provides great opportunity, however, one must analyze the opportunities carefully and implement
them with commitment and rigor to mitigate the significant risk inherent in outsourcing.