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Using Shared Services in a Manufacturing Environment

Interview of Brad DeMent, of the consulting firm of Scott Madden, Inc.
Hosted by Doug Donahue, Vice President of Entrada Group

The Entrada Group is proud to bring you a series of informative interviews with leading authorities on some of the essential aspects of offshore operations. These free, educational programs, hosted by Doug Donahue, Vice President of the Entrada Group, cover current topics important to companies operating offshore or looking at moving operations.

DOUG
Hello, my name is Doug Donahue. I’m Vice-president of the Entrada Group. I’d like to welcome you to our ongoing series of podcasts on issues related to offshore manufacture. Today we are going to explore the subject of shared service centers. While this is a little off subject, at the Entrada Group we think it is an important issue that is going to become more and more relevant in the near future. Over the years manufacturers have moved offshore, mainly with the intent to reduce labor costs. However, this endless quest for reduced labor costs is not enough in today’s environment. Manufacturers are beginning to evaluate other tools to reduce costs and control quality. Over the past year Entrada has made substantial investments in creating a world-class shared service center to help reduce administrative costs and increase efficiency. This investment has allowed us to pass those savings and benefits on to our manufacturing clients. Today’s podcast is going to address many of the benefits and challenges of implementing shared service centers. Again, while not directly related to offshore manufacturing, we hope you will find the conversation intriguing and informative.

That said, I’d like to introduce Brad DeMent of Scott Madden. Scott Madden has been a leader in shared service design and implementation for over 15 years. They service numerous Fortune 500 companies and were recently the recipient of the International Quality and Productivity Corporation Shared Service Vendor of the Year award. Brad DeMent is a partner in Scott Madden’s Shared Service Practices. He specializes in design, improvement and post-merger integration of shared service operations in the U.S. and in Latin America. Brad, welcome.

BRAD
Thanks for having me, Doug. Good afternoon.

DOUG
Brad, what are shared services and what functions are most commonly implemented by manufacturers in low-cost countries?

BRAD
Doug, many of our clients ask the very same question. Most of these clients are in what we would call a centralized model, where they have moved back office functions such as finance, HR, IT, even purchasing, into a central location, and they’ve heard about this shared service concept but they’re not quite sure what it is. We’re often brought in to help them understand the differences between what we would consider a centralized model and a shared service model. Companies seem to be very clear on the differences between a centralized model and a decentralized model, but let me take just a moment to explain – at the highest level – what we consider a shared service model. It’s a model that enables the company to deliver support services such as human resources, financial services (such as accounts payable, accounts receivable, fixed assets), purchasing and IT services to all the business-operating units of a company. By business-operating units you might consider the sales division, manufacturing plants, research and development divisions, etc. They deliver these services as if they were an independent operating unit themselves. So you can encourage clients to think of shared services as truly a business-within-a-business: a business within a corporation with internal clients, such as your manufacturing groups, research and development groups, etc.

For you, Doug, as you know, the Entrada Group and other companies like yourself who are adopting a shared service model, have even more at stake as you’re not acting like a business-within-a-business. You truly are a business with external clients versus internal clients, but you’re set up in a way that you are delivering these services to those clients in the same model that a shared service operation would. And that these are your clients. We try to get companies to think about their delivery in the same way. So they’re not so focused on the corporate operation – the CFO, the CEO - even though they may be still reporting to those people, but they are devoting more focus on the business units as if they didn’t like their services they could just leave, or find an outsourcer, which they can do. So we’re trying to encourage companies to set up these financial, HR, IT-type services in a different model. That requires different tools and different approaches to customer service that are not necessarily inherent in a centralized operation. In a centralized operation, similar to a shared service operation, you do move all these functions to one location. Therefore, you do gain the economies of scale, the cost savings, and the standardized processes. But what we often hear companies who have moved to a centralized model complain about is that these groups are very unresponsive. “They get to my request when they get to it. “ “They don’t really understand my business.“ “What does the corporate office understand about manufacturing or research and development?” “They’re very inflexible.” So we’re trying to get rid of those conceptions in a shared service model primarily by implementing tools, such as service agreements with the businesses, measuring our own performance, reporting our own performance, conducting customer satisfaction surveys, and various other techniques.

The other end of that bookend is the decentralized model, where companies have their financial and HR operations right down the hallway. I can go talk to an HR person down the hall; I can go to the first floor and talk to a finance person; the third floor and talk to an IT person. And what’s good about that is that they seem to be very customer-focused. The business unit likes that. However, what you end up with is that you do the same thing in several different locations throughout your company, which is obviously very redundant and inefficient. It often leads to non-standard ways of doing business; you process an invoice one way in R&D, and an entirely different way in your sales division. It causes a lot of extra work. What we’re trying to do is keep that customer closeness, that business unit intelligence that you find in a decentralized model and keep the economies of scale and the standardization you’d find in a centralized model. We think that by finding that balance with shared services, you tend not to be cyclical; not to erode from a centralized model to a decentralized model and back. Shared services is a concept that’s been around for over fifteen years now. We think that the reason we don’t see people breaking down shared service operations is that it truly does find that balance between economies of scale and cost savings and client service.

The second part of your question, Doug, was: Why do companies do this? I would say there are three primary reasons companies will do this: To reduce costs, to improve services and to leverage information (pull scattered data to one place). These days, companies are most definitely looking at shared service operations to reduce costs. But companies – particularly in a merger and acquisition environment, where they’re acquiring several companies over a period of time - look up and people don’t know where to go for HR services, where to get benefit information and so we’ve had several clients that are more focused on consolidating all the information and standardizing the processes and policies, and going at this more from an improvement to their client perspective.

DOUG
Is it done differently, or are there differences between what you might place in a low-cost environment as opposed to an operation that may be operating in the United States or Canada?

BRAD
There certainly are, Doug. Shared services has been up and running in the U.S. and Europe for well over fifteen years now. Many companies have already reaped the benefits of high volume, low cost functions, such as those mentioned in my previous answer. These companies have gained the trust already of their internal business units and their corporate offices, and as such, they’re being asked to take on lower volume, higher value-added functions. Now it’s common to find functions in well established, mature shared service operations, such as financial planning and budgeting, treasury functions, environmental health and safety, corporate communications. All of these functions fit the shared service model. They’re a little lower volume, add higher value, but they can be centralized and they can maintain close business unit relations.

DOUG
Would a smaller company, because of the lack of scale, tend to migrate more toward a third party provider, as opposed to centralizing it in their own organization?

BRAD
Well, we’re seeing a mixed reaction to that, Doug. We do see smaller companies looking at outsource models. We encourage that, but what we encourage companies to do is to get their hands around the shared service model first. If you are truly acting as that business-within-a-business that I spoke about earlier, then you’re going to know your products, your volumes, your costs and you’re going to be able to make a more intelligent decision about outsourcing. I think, in any event, whether you’re large or small, it does make sense to get your hands around the shared service model. Then, it’s much easier to evaluate an outsourcer that’s operating the same way as a shared service model does, once you’ve moved to that model. What we encourage companies not to do is to outsource a mess: They don’t understand these functions or they’ve been acquired and they don’t want to deal with it, and they just outsource it. It’s best – large or small – to understand the business model of a shared service operation before you go to an outsourcer.

The short answer to that question is yes, Doug, we do think the outsourcing model is a good one, and there are very clear advantages to be gained. But it should be approached in a very methodical way.

DOUG
As I alluded to earlier, most of the people who subscribe to this podcast series are manufacturing companies. Is there a difference in implementing strategies for manufacturing companies versus sales and distribution companies, R&D companies, or general business administration companies?

BRAD
There are, Doug. There are similarities and differences when you implement shared service model for companies that lean in one way more than another - manufacturing more than sales and vice versa. The similarities? It is an important part of the shared service model to standardize. When we go into larger companies that have very large manufacturing operations, but they also have very large sales operations, and R&D operations; we hear a lot that “We’re different. You’ve got to treat us a little differently on our side.” And there is some truth to that, but also if you peel back the onion you can find that, essentially, paying an invoice is paying an invoice whether you’re in R&D or manufacturing. And so we do like to find the places where we can standardize.

Often there are fundamental differences between operating divisions that do require you to customize. In manufacturing, for instance, the shared service model presses you to use technology. If we’re going to centralize all our operations and automate some of these processes, there’s a lot of technology solutions that we help companies implement. One of those is self-service. Once we get a shared service operation up and running, we encourage people to get these services through web portals or interactive voice response systems (press 2 for a form or press 3 to hear your account balance). If we can do that – get people delivering services that are provided by a shared service operation to themselves without human interaction – we can do more with less people in a shared service operation and even reduce the cost further. Now a manufacturing environment often doesn’t lend itself quite as easily, as most of your staff don’t have ready access to a computer terminal or telephone often, particularly the people out on the shop floor. So, Doug, what we do with companies like this – and we work with a lot of heavy manufacturing companies – is we put kiosks out in the break rooms, the cafeteria, in the guard shacks. So people can go to these kiosks and do things like see their pay stubs before their paycheck hits the bank account, see their vacation balances, change their address, and add a dependent. They can do a wide variety of services on these kiosks, and that basically reduces calls and volume into the shared service operation, allowing us to operate with even less people.

DOUG
Is there any difference in the savings – greater or less – between companies who are doing this in the U.S. or European markets versus low cost economies?

BRAD
We think the savings to be gained are more or less on a percentage basis. So what we like to see a good shared service operation gaining – large or small – is somewhere between 20% and 35% reduction in administrative costs. We’ve found that that applies to large companies and smaller companies. What we typically see in small manufacturing operations is your clients are operating or choosing you because you’re in a low cost country. Their strategy is to gain cost savings, so certainly providers such as you, Doug, kind of get a double dip here. You’re operating in an already low cost country with labor costs that could be a fourth or more of those found in the United States. And on top of that getting somewhere between 20% and 35% savings. Companies operating in low cost countries, like Mexico and other Latin American countries, and some in Asia and Europe are even getting more - pound for pound – than the
35% that large U.S. companies are gaining.

DOUG
Well, I appreciate you taking the time to talk with us today. Most of the subscribers to these podcasts are in manufacturing and are always looking for how to improve the quality of their product and reduce costs in today’s manufacturing environment. And, as our solution is about lower cost environments and lower cost labor, we also want to make sure that everybody understand that there are opportunities to reduce costs in administrative overhead also. So we appreciate you taking the time today.

If you would like to listen to the audio of this transcription, or listen to other interviews regarding topics related to offshore operations, please click here.

These programs are offered as a free service by the Entrada Group. If you have any questions on these or any other topics related to offshore operations, email Doug Donahue at ddonahue@entradagroup.com

The Entrada Group provides offshore manufacturing services for the ultimate in efficiency and effectiveness. Entrada supports companies in quickly launching and maintaining manufacturing operations in Mexico without establishing a legal presence. Through powerful economies of scale, Entrada’s on-site shared-services center offers clients exceptional production control with long and short-term cost reductions.

Learn more at www.EntradaGroup.com