Finance: Sharing the load to cut costs
Off-loading non-core functions away from the heart of a huge company is very much in vogue in the US. And it's catching on here.
Wednesday 04 November 1998
"We had a patchwork quilt of different financial systems, which had evolved over a number of years," explains John Smith, the BBC's director of finance. "We wanted to adopt a standardised approach."
But there were other reasons for deciding on radical change.
"We did a benchmarking exercise against similarly sized PLCs and found the costs to the BBC of our financial services was about double that of the others," says Mr Smith. "We wanted to integrate our financial activities with the rest of the organisation, using SAP software.
"To bring that system into place, we knew, would be very expensive. We thought it would be better value for licence-payers to have a joint venture to achieve all this. We needed expertise to make the changes, and we recognised that we had only limited capability in-house."
Outsourcing the corporation's financial support system to a contractor that would operate it as a joint venture with the BBC was agreed to be the best way forward. In February last year the BBC awarded the contract to EDS and Coopers & Lybrand - now part of PricewaterhouseCoopers - for a 10-year period, and they formed a new company, called Media Accounting Services, or Medas, to undertake the contract.
Last year 90 IT staff were transferred to Medas, with the priority of ensuring that all BBC financial systems were Year 2000 compliant. In May this year it was clear the company was coping well with its initial work, and a further 400 finance staff were transferred out of the BBC.
Medas's next task is to install the SAP software to create an integrated IT financial system servicing all of the BBC. After that the company will be seeking to win contracts from new clients, with a proportion of the fees going to the corporation.
John Smith says the operation has not gone perfectly, but he is happy to recommend the concept of shared service centres to other large organisations. "They have taken the staff off our hands, and my feeling is that that has gone well," he says. "The test will come when SAP is in place early next year. Most definitely I would do it again, but I would say to others that they should make sure the circumstances are right. It was the right answer for us."
The biggest problem for the BBC was the design of the new system, for which Medas had responsibility, but which the BBC had to approve. Getting a fast approval from the often slow-moving BBC caused problems on both sides. But, says Mr Smith, the process has been beneficial for the corporation, creating a tight timetable that forced the BBC to make an early decision.
Establishing shared service centres is becoming common in the private sector, but it is still unusual for a public body to outsource what is seen as a central function. There is no reason why others should not follow the BBC's example, suggests Clive Johnson, who has global responsibility for PricewaterhouseCooper's shared service centres.
"Sharing service centres is an idea born out of the United States, where multinational corporations, with many different back office functions, said let's pull them together, site them in lower-labour-cost areas, and run shared service centres as support businesses, providing services back to the core, almost like a third party," explains Mr Johnson.
"The multinationals, having achieved this, said let's see if we can do the same in Europe. A lot of US multinationals are in the process of setting them up, achieving economies of scale, pulling them together, maybe using low-cost sites. It has happened recently because of changes in legislation that allow companies to keep their books outside their home countries, and because of the easing of labour laws."
Britain is one of the main beneficiaries in the development of shared service centres for European divisions of US corporations.
Only Ireland and the Netherlands have been more successful, through a combination of below-average wage costs, good language skills, and, in Ireland, tax breaks in certain locations.
Dell is one of the US corporations that have recently opened a shared services centre in the UK, and PwC runs a centre on behalf of BP-Mobil in Rotterdam. It was agreed that for the BBC it was vital that the centre not only remain in Britain, but continue operating from BBC premises in Ealing and in the regions.
Mr Johnson argues that outsourcing non-core functions can greatly benefit an organisation. "It changes the role of finance away from being about bean-counting. Staff can focus on adding value, and on acquisitions, disposals, price decisions, business analysis. It encourages them to ask, `how do we really support the business?' Shared services can apply to many functions - for example, human resources - but finance is often the starting-point. We have about 40 or 50 clients interested in shared service centres, many of them actively deciding whether to join in."
The corporations that have gained the most publicity in setting up shared services centres have tended to be those, like British Airways and some other airlines, that have established accounting centres in low-cost labour areas, particularly in India and the Caribbean.
Clive Johnson predicts that other corporations will find this increasingly attractive for their global support centres, while multinationals with activities spread across the Far East may seek to centralise shared services in one base, probably India.
Other public bodies are likely to follow the BBC's example, drawn by the economies of scale it offers. This may involve not just transferring existing cost centres out-of-house, but also offering existing externalised service centres the chance to tender for financial support services. At a time when the BBC is facing criticism over its programming, it may be some consolation that its managerial approach will probably be widely copied.
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