Lift & shift...

Financial services companies have for some years been offshoring and to a lesser extent outsourcing many of their operations. These have ranged from customer contact centers and back offices to IT support. However, many banks and insurers are now realizing that there are considerable merits in treating large parts of their finance functions in the same way, although, as Vicky Papaevangelou explains, it is not necessarily straightforward.

As in other countries, financial services companies in France have relied heavily in recent years on outsourcing operational functions such as customer contact centers, in the interests of efficiency and cost reduction. However, pressure on the industry continues to grow. Following the financial crisis, regulators are intensifying their scrutiny. Boards and investors are demanding more detailed reporting and more sophisticated analysis of risk and performance. Improving the finance function of financial services companies has become a priority and is part of the CFO cost optimization agenda.

Banks and insurers are struggling to attract and retain sufficient high quality staff to satisfy the growing demands on them. An increasingly common strategy is to set up captive shared service centers (SSCs) in an offshore location to undertake a range of back-office finance functions, such as transaction processing, basic account reconciliations, accounts payable, expenses processing, Sarbanes-Oxley compliance and the like. This allows the group finance function to focus on higher-value analysis and reporting. A number of major international banks have already implemented or are in the process of implementing captive finance SSCs, either in global or regional hubs located offshore or onshore.

According to a benchmarking study¹ by KPMG in the UK, the preferred areas for offshoring are India and countries in the Asia-Pacific region (refer to our article 'Outsourcing in the Philippines'). In these countries, the average salary costs are approximately one-eighth to one-tenth of those in Western countries, according to the 2009 UBS survey on wages and working hour levels by city². Despite the low wages involved, it seems to be quite feasible in such countries to recruit skilled people speaking different languages with experience in the financial sector.

The specific location chosen depends on the global group strategy, cultural affinities with the host country and cost considerations. The decision to relocate is related to the critical mass of the activities to be sourced, and is generally considered cost efficient when it involves more than 200 people.

According to recent KPMG member firms' publications³, it appears that around 65-70 percent of the processes within finance functions - those of lower- and medium-complexity - can be successfully relocated to a shared service center, with 30-35 percent being retained onshore and near-shore, mainly for regulatory, proximity and complexity reasons. Tax, mandatory reporting and financial control are the processes that are least outsourced. Some centers of excellence dealing with complex processes are created near-shore to support local entities. In this model, only 10-15 percent of processes remain onshore. The role of the CFO is re-orientated to focus on the control, analysis and certification of data published by the SSC: CFO sign-off is always required, and the CFO remains the key contact with the business lines.

In achieving the transition to an outsourced or offshored SSC, two broadly distinct transition models can be identified, which can be termed 'lift and shift' and 'standardize and centralize'. The key difference is whether the operational processes concerned are rationalized and streamlined before relocation or after. Where there are a lot of costly manual processes and few common systems, rationalization onshore is very costly, and it may be most cost-effective to relocate the operations concerned as they are, and then re-engineer them. In effect 'standardize and centralize' involves two major upheavals.

However, the success of 'lift and shift' depends critically on the ability of the receiving management to rationalize, restructure and standardize the processes which have been relocated. Common contributory factors in lack of success include miscommunication between the SSC and the onshore headquarters, lack of local skills to deal with complex derivatives, lack of trust and increased audit costs. The career path for those working in shared finance centers appears to be limited. This can lead to a high turnover of people, as well as making it harder for those in the SSC to build effective relationships across the rest of the business.

In many companies, the combination of inadequate processes and a lack of investment in people and technology restricts performance improvements. Too few SSCs have an adequate focus on customer satisfaction. Strong service level agreements with key performance indicators on quality and performance, a clear hierarchical link between the head of the SSC and the finance function and continuous training are often the answers to some of these issues.

By contrast, where the initial relocation has been shown to deliver efficiency and quality of service, the most successful offshored operations can move up to more complex and sophisticated activities and higher-value processes such as management information and analysis. This requires the SSC to evolve, creating centers of excellence that sit alongside the existing high-volume transaction teams.

In the aftermath of the financial crisis, the finance function in financial services companies has to concentrate much more on high quality analysis and reporting which adds value and improves management decision-making. Too much time and effort is currently spent crunching numbers. Offshoring or outsourcing large parts of the routine to an SSC can free up time and resources for what really matters. It may even result in the creation of valuable new centers of expertise in their own right. But getting it right is difficult: it requires thorough planning and determined implementation.

Article Author

Vicky Papaevangelou
Partner
KPMG in France +33 1 5568 7114 Vicky Papaevangelou View all articles by this author

1. Finance shared services - Delivering the promise: Insights from 2008 research into leading European organisations, KPMG in the UK, October 2008.
2. Prices and Earnings, UBS, August 2009.
3. Finance shared services - Delivering the promise: Insights from 2008 research into leading European organisations, KPMG in the UK, October 2008; Managing Performance Through Shared Services Centers, KPMG in Switzerland, 2007.