Why Germany’s Mid-market "Motor" Is Banking on Shared Services

The mid-market is waking up to service delivery models that improve the assimilation of foreign acquisitions and support international expansion The mid-market, or Mittelstand, effectively represents the German economy (covering 99 percent of its companies), and is widely recognized as the "motor" that drives the country’s progress. While generally not consisting of the kind of brand names that are immediately recognizable, this segment nevertheless, is the envy of Germany’s European neighbors (whereby we can extend the definition to all DACH countries) and tends to dominate whatever industry it operates in, displaying a talent for export and a command of markets that belies its relatively small size and profile. Remaining largely hidden as its products are subsumed by the end product (it makes the machines that make the machines), it’s not surprising that we have, to date, also understood so little about what drives its internal operations. A recent survey1, however, has shed light on this, outing Shared Services as a common denominator for more than half of the sector – and promising a whole lot more. Foundation for Success The very elements that help mid-market organizations succeed in their industry also bode well for a more proactive, centralized, services delivery strategy. Earlier this year, the Bundesministerium fÃ½r Wirtschaft und Energie2 issued a report highlighting some of the characteristics that drive the sector’s success. These include: family-owned and therefore relatively stable, having long-term strategies, being export-oriented, having a relatively strong capital base, largely self-financing and innovation driven (R&D is three times that of its DAX peers), with strong regional ties and an intensely customer focused culture. These considerations, along with a reliance on foreign markets (about 20 percent of revenues – and growing – come from abroad, the majority from non-EU countries3), make a well-considered service delivery framework a natural partner for progress. The lean manufacturing processes that mid-market companies have leveraged to such great effect, and the widespread use of automation and digital technology (for example, Industry 4.0), have already set their products apart. It’s now time, experts agree, to match the manufacturing "edge" with equivalent inhouse support services. It’s a perfect scenario, in fact, for optimizing the business processes that support expanding operations, to maintain the "premium pricing for niche products" strategy that characterizes Europe’s Small and Middle-sized Enterprises (SMEs). The success of this sector is undeniable. The Mittelstand has refined its supply chain, production, and distribution network, enabling it to react to new market opportunities quickly. But as markets broaden and become more international, and as an export-oriented approach puts it increasingly into competition with global players, and into emerging markets, the traditional services framework may not be enough to sustain the momentum. The multi-process landscapes that have commonly evolved across these corporates, while offering flexibility in regional activities, will not translate as successfully into the fast growing emerging markets of Asia, where so much of the growth is concentrated. Shared Services models have already been credited with supporting and offering process discipline to a large number of the world’s leading corporates. In Germany, these include Siemens, Daimler, and Lufthansa. The expansionist policies of German (and other DACH countries’) mid-size corporates are now delivering the same option to their doorsteps. Shared Services presents a reliable, and proven, strategy for delivering standardized, quality, and measurable services across a simplified systems landscape – and it is this approach that is now proving increasingly popular among a large number of German mid-size companies. Size is Not an Obstacle While size has traditionally been a concern – we tend to think of a "critical mass" that makes Shared Services viable – the notion that Shared Services are only forFortune 100 or DAX-sized corporations is nonsense. The model, in fact, presents significant opportunities for SMEs whose internal organizations and frameworks are often fragmented, decentralized, and characterized by multiple support processes delegated to external parties. Organizations as small as Switzerland's Edelweiss Airline [800 employees] can reap the same benefits – and perhaps have proportionately more of an impact – as corporations with thousands of employees around the world. [See article: Edelweiss Opts for Insourcing to Manage its Customer Portals]. The reason is specifically linked to the fact that most of these smaller companies don’t operate with single platform ERP systems, are often guided by random development instigated at local levels and driven by local needs, and lack a comprehensive knowledge management strategy. Shared Services offers all of this in one implementation, and offers a disciplined and transparent platform for controlled growth. Process Improvement Trumps Cost as Driver A recent study by KPMG is association with Georg-August-UniversitÃ¥t GÃ·ttingen1 shines a light on what’s driving the success of the mid-sized market in Germany: it is applying the same process rigor and standardization that have led its products to excel in the international marketplace to internal support systems. In fact, according to the survey over half (53%) of the mid-size companies questioned are already running some form of Shared Services, and 80% report "positive results." Even more encouraging: 78 percent estimate implementation costs at under 1 million Euros, 55% report they have achieved payback within 1-2 years, and 80% have implemented in less than 2 years.1 What is interesting to note, however, is that cost is not the number one driver of Shared Services, as it often tends to be in the rest of the world. Instead, the survey reports, mid-size companies are chasing process improvement, better quality of service, and control – whereby "standardization" is quoted as one of the most valuable results of Shared Services implementation. This is illustrated by healthcare company Coloplast, which established a Finance shared services in Poland five years ago in an effort to improve process consistency and quality across the 15 countries in which it operated, across Europe. Wojciech Faszczewski, Managing Director of Shared Services Centre, Coloplast Finance Europe, explains his challenge as needing todrive quality, standardization and transparency across fragmented processes. Lacking the size to leverage significant transactional scale, and therefore cost savings, Faszczewski nevertheless recognized from the start that there was far more to be gained by centralization than just cost savings. "Because of the size of our enterprise," he explains, "we could not focus on or leverage volume. So instead, we focused on value added services." [See article: Leveraging Nearshore for Added Quality] [eventpdf] International Markets Require Scalable and Reliable Support To understand why process control, not necessarily cost, is driving Shared Services adoption, consider the rapid globalization of markets. Germany is the second largest exporting country in the world behind China, and ranks just ahead of the US. The vast majority of this growth is driven by the mid-market and it is here that continued pressure to deliver results is inevitably leading to a reassessment of the role of support services. The kind of rapid globalization experienced in the past decade demands agility on the part of companies in being able to respond to customers’ changing needs, as well as the needs of brand new customers. Where much of this growth is also M&A driven, it is imperative that new businesses are rapidly integrated and assimilated. Standardized support processes play a significant role here, especially in Finance and Accounting, and Human Resources. The findings of the KPMG/UniversitÃ¥t GÃ·ttingen survey support this idea, highlighting organizations experiencing particularly rapid growth based on international expansion/acquisitions as adopting Shared Services at a faster rate, challenged as they are with harmonizing administrative processes across separate business units. Apart from the obvious benefits around integration and control, this trend also reflects the modernization of historically evolved processes. One company that can relate to this is Kennametal, an American organization with its European headquarters based in Switzerland. Kennametal is one year into a three-year global HR Shared Services implementation, which it launched to gain additional scale as it continues an expansionist strategy that has already seen itacquire 3 companies or groups of companies over the past 3 years alone. Providing quality support for Kennametal’s 14,000 international staff is a key priority, explains Sascha Weiss, Manager Human Resources Operations EMEA, and it is important to be able to deliver the same quality services to additional staff as the company continues to expand. The driving force behind moving to Shared Services, therefore, was the recognition that it needed to be able to rely on a robust staffing service to carry on a sustainable growth pattern. While Kennametal is in the process of rolling out a GBS model over the nest two years, it has, to date, been servicing incountry operations in Germany from a center in Bavaria. With 75% of its European employees based in Germany, this was a natural choice, explains Weiss [see article: Global HR Shared Services Supports Kennametal’s Growth Aspirations]. A Model "Made in Germany" Although a widespread global concept, Shared Services in Germany has developed a style that is uniquely suited to the needs and requirements of domestic corporates. While most Shared Services are built in low cost locations, whether nearshore or offshore, most German Shared Services are located at headquarters (KPMG’s report cites 70 percent of SSOs as being based at HQ), as control and oversight are important to a German board, and the security of having processes located at HQ outweighs the potential cost savings of brownfield locations elsewhere. In this respect, Germany is unusual, but the trend can be explained by referencing German companies’ focus on issues other than cost, when adopting Shared Services. In the same vein, only 25 percent of those surveyed had Shared Services outside Germany, again tallying with a preference to keep strategic services close and maintain management control. Those Holding Out Want More Proof Of the 40% of mid-size companies who, according to the survey, have not yet implemented Shared Services, most claim that there are simply not enough persuasive examples of Shared Services’ application to their industry to persuade them, though only 4% say the Shared Services business case did not hold water. For many, the multiple process landscape that has evolved over time is just to complex to tackle, especially given the relatively hierarchical organization of German corporates, and the difficulty in overcoming these internal barriers when pushing through a change project. An additional factor is the lack of management resource or extra capacity to take on SSO management. In the face of these constraints, many mid-market companies that have not yet felt pressure severe enough to reassess their organizational support systems may prefer to stick with what they know rather than embark on what may still be perceived as a risky transformation. In the face of persuasive evidence to the contrary, however, the tide may be turning soon. References 1. Shared Services Center (SSC) im Mittelstand 2. Bundesministerium fÃ½r Wirtschaft und Energie: German Mittelstand: Motor der deutschen Wirtschaft 3. The Conversation, The secret behind Germany’s thriving "Mittelstand" businesses is all in the mindset, by Jeffrey Fear, Professor of International Business History, University of Glasgow, 28 April, 2014 Sources: German mid-sized companies upbeat despite low investments, Deutsche Welle 14.5.2014 Mittelstand Best Practices, Slideshare by businessthinking Beating China, the Economist, July 30, 2011

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