SSOs & Small Entities (Chapter 6): Conclusions on Migration Case Study

This article is part of an on-going series by Pedro Moreira, based on his experience at Siemens’ Shared Services operation, where one of the projects he ran was a migration within the company’s finance group. Moreira focused his Master’s thesis on the impact of Financial Shared Services, with a special focus on how Shared Services supported the migration of a small Siemens entity into the Global SSO.

His research shows that as SSO transitions generally try to keep complexity to a low level, they tend to leverage a standard or generic approach to all business units. When dealing with smaller entities, however, this creates a danger, as their rules, reality and dynamics are unique. Small entities, with Finance functions staffed by 10 or fewer people, generally have broader responsibilities within one role, so services that would not be core to the SSO need to be considered as part of the migration. This creates added cost and complexity.

Moreira recommends that companies rolling smaller entities into their SSO should do so via a special "small entity migration wave".

"The findings and recommendations of my thesis are quite important in terms of analyzing common organizational structures within an SSO, understanding how Shared Services serves small entities, and, also, how it can ultimately lead to less than optimal savings and operational efficiencies", explains Pedro. The recommendations he makes point to organizational changes and measures required to reverse the negative impact, as well as tips on where and when this can occur.

"Since starting my thesis, I have used SSON’s online resources as a source of information and ideas on the latest SSO developments and technology," Pedro explains. "Now, I'd like to contribute back to this community by sharing the knowledge I have acquired."

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In the last article in this series I evaluated questionnaire results, confronted these with the hypothesis in study, and presented a theoretical perspective by stating the importance of the three main components (Corporate, Entity and SSO) when setting up an internal SSO. Now we’ll focus on the conclusions of the study.

Closing Interview at the Entity

After sharing the questionnaire’s results with the case study entity, we set up an interview with their CFO to get a view of the obtained results from the entity’s perspective and to obtain further information that would help explain the negative results against. To this end, we prepared an interview script with open end questions, allowing a deeper dissertation on the topic. The key data collected was that:

• One FTE was reduced after migration with an additional one planned for within a few months – due to current general policy of personnel reduction and not directly caused by migration;
• The GSS was currently responsible for approximately 50% of all financial transactional activities of the entity;
• Uncertainty regarding the current size of the Finance team at the entity and whether it was large enough to ensure stable operations. Also uncertainty whether remaining FTEs were prepared enough and competent to embrace new tasks, e.g., controlling (as a result on the expected activity scope shift);
• Feeling that the post-migration reality demanded additional efforts and that there was a duplication of resources (FTEs) in the interdependent GSS/entity processes, with double executions and controls being performed;
• Stability of processes, quality or cost reduction not felt at entity level;
• With the current organizational structure, each GSS department (e.g., AP, AR) contacted individual or multiple contacts of the entity, i.e., those responsible for AP, AR and so on. This meant that entity personnel was approached on the same topic by different people from the GSS side. This structure and way of work is not efficient and is time consuming;
• The guideline for implementation/migration reported by the entity was that the activities selected for migration were pre-determined with no adaptation to the entity’s reality. If so, this was in line with Siemens’ "Lift-Drop" implementation strategy;
• From the entity’s perspective, the application of common rules (group-wise), process improvement and stabilization could also have been accomplished not with the migration of Finance activities (to the SSO) but by strengthening audits and with increased cooperation from corporate HQ and the central (HQ) departments. Previously, these had not worked very closely nor directly with the entity. There was also difficulty in seeing any cost reduction on the entity’s side as a consequence of the migration and from working with the GSS.

This new data complements what has been collected thus far, however the perception of negative impact remains. We’ll proceed now to analyzing, based on everything we’ve gathered until now, the specific factors that contributed to this negative impact on the entity.

Framework for Small Entities

As explained previously, many companies are served by the GSS and these have different dimensions. Within the Siemens world, our case study entity is considered a "small entity". The differentiation between small, medium and large entities is supported in relevant decision criteria based on a standard approach for shared service creation, the expected economic benefits and entity stability after migration; and it is here that we find why entity size is crucial and what gives this a particular perspective.

Kai Zabel, in his article "Shared Services for Smaller Entities", defines five points which help us frame an entity as small (see chart below). These are Revenue and Finance Cost (both in the 4^th quartile), Number of Finance FTEs, Number of Remaining FTEs, and Number of FTEs to be Transferred.

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These five points are meant as a rough guide. In order to be considered a small entity, however, a company would need to be in the 4^th quartile in both revenue and finance cost wise, have roughly ten Finance FTEs, and 50% of these would be transferred in a Finance migration scenario.

[click to enlarge]

In the table above, we’ve used Kai Zabel’s principles and bridged these with our data, framing the entity as a small entity within the group. Sales and Finance cost indicate total volumes in millions and even though not enough data on the group is available to confirm that the entity is within the 4^th quartile, this fact is highly probable. Concerning the FTE indicators, we can observe that the entity is within the defined parameters.

In this context we asked Kai Zabel for an interview. As author of the article and an expert in shared services, his insight has proven extremely valuable to this study. From his analysis of our case study we’ve collected the additional key information:

• The reduction of 1 FTE in 7 is considered low. It would be expected to have achieved a 50% reduction (3 or 4 FTEs) and this could be achieved with personnel reduction or assignment of new tasks within the entity. It’s possible that there is distrust within the entity regarding the new model and that therefore the resources are maintained for risk mitigation;
• Abnormal activity split when compared with large entities;
• The sense of double work, additional efforts and duplication of resources is an indication that the current service configuration can still be improved, otherwise one can expect double controls/executions/verifications;
• After a migration the local structure stays in charge of and focuses itself on audit and control functions;
• As reasons for the adoption of Shared Services by a corporation we have on one end of the spectrum cost efficiency, where the companies to be incorporated into the SSO are analyzed solely from this perspective, and no efficiency gain foreseen is left out. On the opposite end of the spectrum we have internal strategy, where cost efficiency is not a relevant factor whatsoever and all companies are incorporated. These two extremes are not the norm and SSO projects are developed in several waves; in the first wave you integrate the companies/activities that will generate the greatest impact, thereby demonstrating success as early as possible. The small entities are generally integrated in the last wave, due to their smaller impact;
• If a migration project is executed without top pressure, the reduction of local FTEs is minimal, as local workers assume, all of the sudden, controlling and audit roles or the reduction is achieved through people nearing retirement age (natural attrition). Specifically in small entities, it’s normal that individual workers have several responsibilities and so after a migration it’s claimed that none have become redundant (e.g. worker X,Y and Z have only transferred respectively 20%, 60%, and 40% of their tasks, therefore cannot be made redundant);
• A recurrent flaw of a SSO project is how to reorganize the local activities and functions after the migration, so as to maximize the number of redundancies. A key factor is to have the mandate to perform this reorganization on the local entity. However, the standard approach is to transfer activities and leave local entities in charge of their own reorganization and management, as this keeps the complexity of the SSO project low and means a standard approach for all entities, no matter their dimension;
• Even though many entities already work on a corporate compliance environment before a migration, the SSO environment encourages and enforces segregation of duties, documentation, creation of controls and adherence to corporate standards – all of which are more difficult to implement in individual entities, in particular smaller ones. It can also happen that nonconformities that were not initially detected in migration are recognized when the SSO is audited, and corrective measures can be applied more promptly. Another important fact is that while a small entity may represent a low risk (of nonconformities), a large number of these entities in an SSO may potentially represent a high risk.

Closing Perspective

We’ve already seen that the GSS is divided into several shared services centers, each serving a specific territory and companies with different dimensions within that area. We’ve also seen that SSO projects initially aim to gain transactional volume. This is achieved with the integration of entities and activities that will have the greatest impact (larger entities). This was clearly Siemens’ objective with its Finance Bundling project. The initial LIFT-DROP phase allowed results to be quickly achieved with the migration of a defined set of services. Specifically, the LIFT-DROP phase was critical in terms of time limitation and therefore a transition guide to be applied worldwide ensured the systematic processing of the migration projects.

In this context and independently of the number of waves that the LIFT-DROP phase contained or in which one of these our case study entity was included, everything points to that fact that the level of service provided by the GSS to the entity (and other small entities) was pre-defined and little or no consideration was given to its reality and specificity, thereby not considering an extension (potentially) to service or impact.

In the CHANGE phase using PIA (Process Improvement for Accounting), systematic improvement, standardization and best practices were sought. Considering that PIA focus is primarily on transactional activities under its scope and since the entity also had a relatively high percentage of these activities, improvements, changes or flaws would be perceived at their level.

The strategic decision and the assumptions made by Siemens in the creation of its GSS were important to this study. The conjunction of this knowledge is important as it can contribute to the creation of new concepts and approaches to SSOs that serve small entities. These in turn can be applied to migration projects, no matter their level of maturity, past, present or future.

We are aware that different perspectives regarding the results of this work (e.g. corporate, higher organizational level) could not be measured in this study, but should be in future research. It is therefore in the impact that we were able to measure at the entity level that we’ll focus our recommendations in the final chapter.

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