EMEA’s shared service centers
Companies across Europe, the Middle East and Africa (EMEA) have been at the forefront of the adoption of shared service centers (SSCs) in order to lower costs over the past two decades as part of a broader corporate agenda that encompassed globalization and the expansion of outsourcing. Now, many EMEA companies are putting SSCs at the heart of their treasury transformation initiatives and are considering their deployment to help achieve a number of new goals.
Chief among these objectives are the leveraging of centralization to enhance visibility and control and consequently improve risk management, including within increasingly important areas such as cyber security and regulatory compliance. In addition, many companies are looking for ways for treasury to create value by working with the business, the CFO and other departments, such as human resources, making better use of the massive volumes of data produced by SSCs and more effectively leveraging investments in enterprise resource planning (ERP) systems such as SAP or Oracle.
By further emphasizing the value of centralization, the drive to improve risk management and embrace a more strategic role for treasury is boosting the importance of SSCs. This is because the standardization and automation that characterize SSCs are prerequisites for many of the changes that corporates in EMEA need to make if they are to achieve their ambitions. However, while SSCs are critical to achieving these aims, they must evolve and become more sophisticated if they are to be of value in helping the company to work smarter and leverage digitization.
Enhancing visibility facilitates compliance and risk management
Improving visibility and control have been a critical objective for treasury in the post- financial crisis period because of the increased importance of working capital and liquidity management. However, there has also been a significant growth in compliance and regulatory requirements in recent years: SSCs have an important role to play in meeting these demands.
For example, anti-money laundering legislation and sanctions regimes – and the sizeable fines and reputational damage that can result from breaches – require greater scrutiny of who, why and where a company or individual is being paid by a corporate.
In a decentralized company, local operations are often responsible for accounts payable and receivable activities and bank relationships. Consequently, it is often extremely difficult to gain sufficient visibility for a treasurer to be confident that compliance is being achieved. By centralizing these activities to an SSC and rationalizing and streamlining bank connectivity, compliance is significantly easier to enforce and monitor: standardized processes and controls make compliance breaches much less likely.
While centralization in an SSC is undoubtedly beneficial in terms of compliance, it is crucial that expertise about individual markets is retained within the SSC. For example, when functions are transferred to an SSC, local knowledge can easily be lost and the context of a payment misunderstood. In addition, corporates should also make full use of the expertise and experience of their banks, especially given the fast-changing nature of many regulations.
Just as with compliance and regulatory requirements, increasing levels of cybercrime, leading to fraud, are difficult for local entities to detect and address adequately. Necessarily, they do not have the resources or expertise required to combat these new security risks. In contrast, at the SSC level, robust processes and advanced technology can be implemented more easily and efficiently.
Adding value requires more centralization
The desire by corporates to get more from their SSCs than simply low-cost processing – and move them from being a cost center to potentially being a center of ‘value add’ – is part of a broader change taking place across many corporates, not least in the treasury function.
Treasury is becoming more strategic in nature and is being seen as an internal business partner that can drive process improvement across the organization. As a result, it is adding new functions such as in-house banks to manage internal liquidity, make payments-on-behalf-of (PoBo) group entities or even manage supply chain finance initiatives. Other SSCs are expanding their geographical scope, those in EMEA are including countries in Africa, for example (see box).
For treasury to create new value, however, it is essential to be able to measure its success. Consequently, there has been a significant growth in interest in identifying and implementing key performance indicators (KPIs) that reflect treasury’s valueadd. Useful KPIs include return on liquidity or more traditional measures such as days sales outstanding. The increased need to measure performance is not compatible with a decentralized treasury structure.
Therefore a broader range of functions and geographies are being centralized to SSCs in order to implement KPIs. SSCs are already a repository for large volumes of cashflow-related data. As the volumes of this data grow – and corporates increasingly recognize its value – ‘Big Data’ analysis is being used to facilitate the introduction of treasury value-add metrics. Less than half of EMEA corporates currently have systems in place to measure the value created by treasury. However, this number is expected to grow rapidly in the coming years.
SSC locations and geographical scope
Many of the most important SSC locations in EMEA – such as those in Ireland or Central European countries such as the Czech Republic – have been established for decades. Although local labor costs have risen in many cases, existing SSCs often manage to remain competitive by adding more complex functions or because of the skills of local employees are hard to replicate elsewhere.Nevertheless, some existing SSC locations are becoming saturated, making talent sourcing and retention more challenging and expensive. As a result, new SSC locations are emerging in countries such as Hungary, Lithuania and Romania, driven by low labor costs and evolving regulation. It is important to note that while new locations may have lower costs they can also be perceived as riskier and may lack the depth of skills required.
Meanwhile, a number of companies are seeking to establish both treasury hubs and SSCs in the United Arab Emirates to help them manage increasing flows between the Middle East, Europe and Africa. Government initiatives to create a financial center and tax incentives have also encouraged an expansion of SSC activity. There is also a nascent SSC sector in Egypt, South Africa and Morocco. More generally, there is growing interest from corporates to include African countries in new or existing SSCs in order to improve efficiency, lower costs and enhance visibility and risk management.
This article was first published by Citi in its ‘Shared Service Center Regional Trends’ brochure. It was written as a co-production by John Murray (Citi) and Hugh Davies (Zanders).