Shared Service Centers (#218)
/In this podcast episode, we discuss the pros and cons of using a shared service center. Key points made are noted below.
Nature of a Shared Service Center
A shared service center is a single location within a company that handles all of its accounting. For example, if you have 10 subsidiaries, one service center handles all of their payroll, and customer billings, and accounts payable, and so on. Let’s start with the advantages.
Control Issues
First, the controls are much better. By centralizing accounting, you can impose a really solid set of controls in one place. An audit team can come through every now and then and recommend changes, which is pretty inexpensive, because there’s only one accounting system to review. If you had accounting departments in every subsidiary, it would be much more expensive to keep checking every department to make sure that the controls were adequate.
And a related issue is that it’s more difficult for anyone to engage in fraud in a shared service center, because the controls are so good.
Management Reporting System
The management reporting system is better, because all of the company’s financial information is stored in one place. Management can access all kinds of information through a dashboard system, so they can maintain better control over the business.
Staff Quality
Another advantage is that the quality of the accounting staff should be higher. That’s because the company is saving money by aggregating the accounting operations in one place, so it can spend more money on higher compensation for the accounting staff. And it really needs to, because the accounting systems are more complex, and that calls for a more senior accounting person.
Software Licenses
And here’s another advantage. Instead of paying for software licenses for a bunch of subsidiaries, you just pay for one – in the shared service center. That one software package might be high-end, because it has to handle a lot of transactions and a lot of users, but there still should be a cost savings.
Intercompany Transactions
In addition, the subsidiaries might be buying from each other, so there are intercompany transactions that have to be backed out of the financial statements. With a shared service center, the software can detect when this happens, and backs these transactions out of the financial statements. When the accounting is spread among subsidiaries, spotting intercompany transactions is not so easy.
When subsidiaries are located in different countries, the software can net out buying and selling between the subsidiaries, so there’s less need to incur foreign exchange fees for payments between the subsidiaries.
Cash Management
Yet another advantage is on the cash management side of things. The shared service center can monitor cash balances at all of the subsidiaries, and do the best job of investing it or of moving it around to cover any shortfalls within the company.
Closing the Books
And a final advantage is that it’s easier to close the books and issue financial statements. You don’t have to wait around for each subsidiary to close its books, which could delay the corporate closing for a long time. Instead, the corporate controller has complete control over the entire accounting process, and so can probably release financials in just a few days.
The Downside of Shared Service Centers
What’s the downside? The main issue is the way in which the organization is designed. Let’s say that the corporate parent acquired all of these subsidiaries through acquisitions. This means there’s an independent team running each subsidiary, and they like to maintain control over their operations. And that means they don’t want to lose their in-house accounting and finance functions.
So the corporate management team has to decide whether it’s worthwhile to annoy the subsidiary managers by taking away these functions. What happens a fair amount of the time is that only a few activities are centralized. Maybe accounts payable and treasury are centralized, and everything else stays local. This outcome is nowhere near as economical, because you still have accountants in every subsidiary, and have to manage them and monitor control systems, and there’s a greater risk of fraud. So the way in which a company was originally brought together plays a large role in whether a shared service center will ever be created.
Another issue is that each subsidiary has its own way of doing things. When you install a shared service center, every subsidiary now has to use the same policies and procedures and forms when dealing with the central accounting group, which probably varies from what they were already doing. And that can annoy people and make they resist the changeover.
And they might have a point. There could be good reasons for certain unique procedures at a subsidiary, and especially when it’s in a different line of business from the other subsidiaries. For example, the transactions that a car dealership handles are different from what a book publisher does, which are different from what a concrete plant uses. So when the subsidiaries are all in different businesses, it can be difficult to operate a shared service center.
Another concern is the management capabilities of the corporate accounting and finance group. These people have to be top notch, because they’ll be operating an advanced accounting system that requires every subsidiary to forward a lot of information to the shared service center, where it has to be processed perfectly every time. If the central accounting team screws up, then there’ll be all kinds of pressure from the subsidiaries to move the accounting back to them. And they’d be right. If the central accounting team keeps not paying suppliers, incorrectly billing customers, and screwing up payrolls, who is going to want them?
And another concern is when there are subsidiaries around the world. In this case, the shared service center has to operate 24x7, with staff on hand all the time to handle the needs of each subsidiary. It’s quite difficult to hire good accountants who are willing to work second or third shift, so the usual solution is to operate a separate shared service center for a set of time zones. So maybe there’s one center for Asia, another for Europe, another for the Americas, and another for the Pacific.
So in short, a shared service center can be a very good idea, but it depends on the circumstances. For some organizations, it’s probably not going to work.