Shared Services in Lieu of Outsourcing: Offshore Captive Internal Bank
October 16, 2009 by Bierce & Kenerson, P.C.
Summary.
In making the classic “buy vs. build” decision in relation to services to manage sophisticated business processes, enterprises may elect to establish a captive enterprise to perform “shared services” for affiliates. The “shared services captive” is an alternative to buying outsourced services. But it is also an alternative to internal administration of a business process separately by individual departments, divisions or lines of business. Shared services captives can provide key advantages for diversified multinational enterprises, particularly as a cost-reduction technique when sales and sales margins might be eroding in a global economic downturn.
Captive Internal Bank.
Sony Corporation, the Japanese-based electronics and entertainment group, announced in June 2003 that it was planning a major expansion of intercompany banking services to help reduce financing charges and manage currency risks for all affiliates.
Cost Savings.
According to Sony’s managing director for Global Treasury Services, Mr. Hiro Kurihara (as quoted in an interview with the Financial Times), the London-based shared services operation will generate cost savings of approximately $30 to $40 million per year.
Risk Reduction.
In addition, Sony projected reduction of risks of changes in currency in connection with the settlement of intercompany transactions. Sony plans to offset foreign exchange risks with services — normally offered by money-center banks — of “automatic cashless settlements” and “automatic sweeping.” This requires investment in information technology and integration with others in financial services markets.
Centralization, Specialization and Scale.
Sony’s Global Treasury Services acts like a clearing bank for all affiliates. In this centralized function, the shared services affiliate can aggregate volumes of transactions that are generic, but whose handling requires specialized skills. As a result, economies of scale can reduce per-unit costs and increase focus on specialized transactions that internal financial executives in operating affiliates might not have, or might find difficult, time-consuming or costly to acquire. The Sony shared services affiliate reportedly manages 95% of the enterprise’s financial derivatives and exchange swap transactions.
Transition and Transformation.
The transition to an internal financial services captive is part of a global restructuring that will result in accounting charges of approximately $1.2 billion. Restructuring to include new, enhanced shared-services affiliates may help multinationals such as Sony to transform their services models by increased efficiency and cost management.
Integration with Insourced Transactions.
Establishment of a shared services affiliate requires careful attention to integration with other internal processes. The shared services affiliate must define its “services offerings” and enable managers in affiliated lines of business to use the services with minimal cost and delay. As a result, virtually all “shared services” are digitally integrated. The degree of integration may range from the use of telephones and e-mails to a web-enable Internet-accessible portal. As a result, shared service affiliates generally are purchasers of services and technology from third parties.
Integration with Outsourced Transactions.
Indeed, shared services providers may be the largest purchasers of outsourced transactions. For example, Proctor & Gamble was negotiating for a complete sale of its shared services affiliate to a global outsourcing services provider in 2002. When P&G was unable to obtain its desired sales price at for the services charges that it wanted, P&G chose instead to hire Hewlett-Packard to provide selective outsourced services to support its insourced “shared services” operation.
Advantages in Shared Services.
Shared services affiliates, or “captive” service companies, have many of the advantages of an outsourcing without any loss of ownership and control over business processes, technology, intellectual property and personnel. Shared services captives can develop and retain knowledge capital involving sophisticated business transactions that individual affiliates cannot acquire due to smaller volume of similar transactions. As the business process involved becomes more subjective and susceptible to business judgment, shared services captives retain an advantage over outsourcing because that very subjectivity might be a core competitive advantage and might not be scalable.
Risk Management in Shared Services.
Adoption of a “shared services captive” approach involves a number of risks that can be managed by treating the captive as an external service provider of outsourced services. Such techniques include:
- adoption of “service level agreement” obligations, with financial incentives and consequences for failure, applicable to the management and employees of the shared services affiliates;
- details concerning the integration of the captive’s services with those of the other operating companies or lines of business;
- suitable insurance coverages;
- suitable contracting procedures for outsourcing of certain perfunctory tasks of the shared services captive to independent outsourcing services providers;
- human resources and intellectual capital management techniques for aggregation and accumulation of related processes and improvement in business processes, quality of service and optimal alignment with the key performance indicators of the core business’s mainstream operations.
Shared Services on the Continuum of Insourcing and Outsourcing.
In conclusion, shared services companies, or captives, perform roles that run along the continuum of fully vertically integrated insourced operations to a skeleton of core competencies supported by a network of outsourced operations. If a business process can be outsourced, it can also be insourced after the outsourcing. If it has been insourced, it could be structured more efficiently as a captive to look like an outsourcing. And once structured as an outsourcing, it could become a true outsourcing service provider to support non-affiliated customers, and could even be spun off to shareholders or sold to a strategic buyer. Thus, the captive shared services organization can mutate according to trends affecting customers, suppliers, corporate strategies, changing processes and changing marketplaces. In establishing internal captives, the lessons of outsourcing can improve performance and flexibility.