Shared Service Centres: Melanie Knight and Noel Cullen Explain Why You Need to Factor in Far More Than Tax and Labour Costs When Choosing a Location for Your SSC
Knight, Melanie, Cullen, Noel, Financial Management (UK)
As many of the early adopters of business process outsourcing have found to their cost, the expense of leaving an unsuitable location once a shared service centre (SSC) is operational can be prohibitive. It's vital, therefore, to take a robust approach when selecting a destination in order to minimise risk and maximise the long-term savings. The method we recommend uses three filters to determine the best location: geographical, business and financial.
The geographical filter covers both political and environmental factors. You should contemplate the widest range of regions to create a long list of possible sites, sifting out politically unstable areas with an unsuitable support infrastructure. Emerging destinations such as Romania and Bulgaria should be considered, as well as the established business process outsourcing providers, given the growing capabilities of these countries and the savings that could be achieved. You may also need to take into account the real risk of a natural disaster in certain parts of the world. A number of SSCs in India, for example, have had to close in recent years as a result of flooding.
The business filter covers operational factors, determining which locations can meet the needs and match the capabilities of your organisation. A lack of cultural fit might eliminate a number of offshore locations and lead a company to look closer to home. A number of US firms, for example, use SSCs in Caribbean countries, largely because of their proximity to, and relatively close cultural alignment with, North America.
There is also a growing trend for companies to locate SSCs in different countries under one management umbrella, which places extra emphasis on developing robust governance structures to manage the risks from such multinational activities.
The financial filter examines cost trends, including those of labour and tax. This requires a detailed review to ascertain the relative strengths and weaknesses of candidate locations, focusing on financial parameters and their relative importance for the organisation. It's vital to consider long-term forecasts including movements in real-estate prices and relative tax rates in order to future-proof your selection.
Too many organisations go straight to this stage without using the other two filters. This usually results in the erosion of the expected benefits of their SSCs as soon as employment costs and tax rates increase in their chosen locations.
Once you have narrowed down the possible locations to a shortlist of candidates, managers need to make site visits in order to see the reality on the ground. …