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Driving Strategic Value China Shared Services and Outsourcing in the Extended Global Enterprise kpmg.com/cn

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Driving Strategic ValueChinaShared Services and Outsourcing in the Extended Global Enterprise kpmg.com/cnOur shared services and outsourcing teamEgidioZarrellaClients andInnovation PartnerAdvisoryHerrmanCheungPartnerConsultingNingWrightPartner-in-chargeChina OutsourcingJamesOCallaghanPartner ConsultingKai CuiPartnerConsultingMary ChongPartner Consulting 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. ContentsForewordAs the Shared Service and Outsourcing (SSO) market continues to evolve within the China market, we are seeing radical shifts in the way that organisations are using SSO.From conception through to maturity and beyond, we are seeing new and innovative models and concepts emerging.This is a dynamic industry that does not sit still.As a result it creates new opportunities and services that organisations are leveraging to create value and enhance delivery. However, it also comes with a fresh set of challenges and new requirements.Within this report, we explore some of these concepts and models along with how they will likely impact likely impact the China market. The core focus throughout this report is innovation and how organisations will have to change the way that they see and use SSO if they wish to realise and harness the real value of these centres and delivery models.Innovating the new model1Application to existing business models7Evolution11Whats next?19The end state extended enterprise global model21Challenges23 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.1 |Shifting to Strategic Shared Services and OutsourcingValue generation(holistic approach)VendorrelationshipContractmanagementBusiness processas a utilityOutsourcingCrowdsourcingUnsourcingHow will you be usingSSO in 2013 and beyond?Creates agilityand innovationDefnition ofnew solutionsReduces workforceCreate new scaleOutcome-based modelFlexible workforceScalableCheapScalableUntapped virtualworkspaceReducesresponse timeNew ways ofincentivisingAccess to breadth of talentUtility-basedservicesInnovativetechnologyConsumption-based servicesMonitoring viamobile appsStrategicpartnershipsHolistic vs servicelevel agreements (SLAs)How is outsourcing evolvinginternally and industry wide?How are vendors monitored and measured?How has outsourc-ingafected work practices?How is techonology facilitating more efcient processes?How do you manageoutsourced services?How will you be using SSO in 2013 and beyond?CrowdsourcingOutsourcingVendor relationshipBusiness processas a utilityContract managementUnsourcingValue generation(holistic approach)efficient processes?How is technologyfacilitating morepractices?How has outsourcingaffected workHow is outsourcingevolving internallyand industry wide?How are vendorsmonitored andmeasured?How do youmanage outsourcedservices?Leverage new technologyPortfolio managementStrategic partnershipsEye on the future: How will you and your competitors be using SSO in 2013 and beyond? SSO the tools with which an organisation can transform its operations is undergoing a transformation. The definition of the traditional SSO model is currently being challenged, and the concepts and models within this arena are quickly evolving. SSO is no longer driven only by cost-cutting objectives or restricted to moving transactional, fragmented services to a third-party provider or a captive. Many large organisations that operate in multiple locations have adopted or expanded their SSO models over the past decade. While the use of the SSO has become normal practice, most have Innovating the new modelapproached this model with cost reduction in mind. Few are capitalising on how an SSO model can provide additional advantages, and fewer still have actually been able to improve their model to fundamentally advance the organisation and gain a true competitive edge.However, the approach to SSO is now dramatically transforming to combat market challenges, capitalise on changing consumer demands and take advantage of new technologies. It is now about creating and sustaining an innovative, dynamic and agile environment.MODEL/CONCEPTCHALLENGEVALUE 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 2Drivers for changeMany factors are driving the need to consider new and innovative SSO arrangements. Key factors include:Continuous pressure on profit margins: Providers are already maximising cost efficiencies through cost arbitrage and utilising a low cost location.However, increasing labour costs have resulted in organisations looking to other areas to find a competitive advantage. Future cost savings will need to come from greater process automation, more streamlined and efficient processes, greater economies of scale and alignment between customers and vendors. Slow market growth recovery and instability: Market challenges are forcing organisations to focus on cost reduction initiatives. This is prevalent in the banking, healthcare and telecommunications sectors. Many organisations are embarking on such programmes to release short-term cash, however, this may impact their future growth plans. Growing consumer demand: Consumers now demand and expect products and services that are better quality, have greater customisation and that are available in real time. The norm emerging in the corporate world today seems to be a more retail consumer mindset. More importantly, consumers are no longer interested in committing to long-term contracts due to short-term business challenges. As such, more flexible solutions need to be identified and integrated into the business model.Demand for transparent and controllable pricing structures: Consumers are progressively more price conscious and are demanding predictable and transparent pricing structures and reporting to enhance financial flexibility and the ability to monitor and manage their costs in real time. Regulatory pressure: There is increased stringency from regulators, forcing organisations to enhance their governance structures by reviewing vendor management strategies and relationships. This highlights the need to ensure performance measurement reflects an organisations strategic direction, how reporting should effectively support the transparency of services and the importance of clear, defined operational structures, roles and responsibilities. Availability of new technologies: Technologies such as Cloud and social media are providing innovative avenues to conduct business. These technologies are reshaping how processes can be delivered, and converging historical consumer practices within the corporate world.Increased risk as more services are outsourced: Operational risks increase as more services are outsourced. Organisations may lose knowledge and key staff, and become increasingly dependent on third party service providers to deliver more complex services, e.g., managing call centres and interfacing directly with customers. As such, there is now a greater need to manage the portfolio of outsourced services to minimise this risk exposure.Global services export market in China is forecasted to grow by between 20-25% each year until 2015, hitting an overall value of USD 9.5 to 10 billion. Global Locations Compass: China, published by Everest Group, May 2012. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 3 |Shifting to Strategic Shared Services and OutsourcingProvider relationship complexityCloud-sourcingCrowd-sourcingBusiness processas a utilityHIGHLOWLOWHIGHStandardisationof processesOutsourcingSharedServicesUnsourcingIn order to enhance existing investment, or as part of wider transformation initiatives, organisations are seeking to improve global delivery and process performance, support business growth and improve financial control and flexibility using SSO.New and innovative concepts are being tested to meet these enhanced organisational objectives. Although cost reduction is still a baseline prerequisite, organisations are now also exploring concepts that will provide a competitive edge. They are adopting ideas that are a continuum of integrated service concepts rather than a series of discrete options and capabilities. Source: KPMGExamples of innovative SSO concepts include: Business process as a utility Cloudsourcing Crowdsourcing UnsourcingThe key parameters leading to changes in the traditional outsourcing model are the complexity of the provider relationship and the standardisation of processes. As illustrated by the graph below, emerging SSO concepts tend to be low in provider relationship complexity and high in process standardisation. This results in more nimble, flexible and easy to maintain arrangements that are more adaptable to the changing business needs.We have also charted more traditional models for a comparison.Emerging SSO concepts 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 4Concepts Overview Provider relationship complexityStandardisation of processesBusiness process as a utilityA standardised platform/service allowing organisations to utilise provider services in a highly scalable and flexible way, in order to predict and manage costs.This provides minimal strategic value to organisations, as the provider is limited to performing operational processes. The relationship with the provider is driven by Service Level Agreements (SLAs) and Key Performance Indicators (KPIs).Standardised service offering and platforms increases efficiency and economies of scale.CloudsourcingRuns a function or process utilising Cloud technology and utility-based pricing pay as you grow utilities, e.g., electricity. You use it when you need it, and pay for only what you need when required. The provider landscape will change as the traditional SSO business model combines and competes for market share with telecommunications and technology providers that offer the latest in Cloud platforms. Similar to a utility based model the relationship is controlled using SLAs.The level of standardisation is high, and as a result, the market is likely to see an increase in the number of out of the box business solutions requiring integration, but minimal technology and infrastructure support.CrowdsourcingAn outcome-based model where participants are requested to contribute solutions/outcomes to a defined problem in exchange for financial reimbursement and/or personal recognition. The purpose is not to provide ongoing strategic value (although this may be the result of some participants submissions).Overall, this is a relatively simple relationship, as the organisation sets guidelines that must be adhered to by the participants.It is highly customised to the project at hand; outcomes or the brief dictate the process that participants must abide by and deliver to. UnsourcingOnline social network communities/forums to facilitate customer support to solve specific problems.Moderately complex relationship as effective management of social network communities/ forums is crucial to the overall success of the outsourced service.Engage and utilise the broader customer base to solve primarily tactical challenges.Again, this is a more customised service.To better understand why we have positioned the concepts above, the following table elaborates on the axis (provider relationship complexity vs. process standardisation) for each of the concepts:We explore the concepts and their benefits in more detail below.Business process as a utilityFinancial flexibility with the ability to control costsEconomic volatility has seen severe downward pressure on profit margins. Organisations need to shed fixed cost overheads, resulting in their willingness to outsource core processes. In contrast to developing relationships to grow business capabilities, some organisations key goal is to have full control over expenditure. The core of this model is that they only pay for the services and information consumed, so that scalability and flexibility become the keys to success. This model provides the organisational flexibility to scale services up or down based on fluctuating volumes instead of being burdened by fixed costs that are hard to manage. Transparent pricing, highly standardised processes, and the ability to use as much or as little of the service as they like is an enticing option. A ready-made solution with highly standardised processes and agreementsA standardised platform is developed to purchase business processes. As processes are standardised with the advantage of economies of scale, organisations can exploit providers as a utility and only pay for what is consumed. This has resulted in a move away from fixed scope and long-term contracts in favour of shorter, more flexible contracts. Organisations can also use this model to quickly enhance business processes or adopt a more standardised approach. As such, organisations have access to more efficient processes without having to implement a substantial change management project. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 5 |Shifting to Strategic Shared Services and OutsourcingCloud computing is rapidly evolving. Providers such as Salesforce, Amazon and Google offer Cloud-based development and hosting platforms, which provide an all-in-one hosting and support solution for meeting the changing needs of the business.1Questions that the board and senior management are asking include how they can take advantage of Cloud capabilities and what are these capabilties. As IT contracts come up for renewal and as more and more core IT functions are potentially moved onto cloud platforms, the office of the Chief Information Officer (CIO) needs to change from being a technology delivery function to one that starts to manage service providers. Achieving success from these platforms requires a clearly articulated IT roadmap in order to provide sound strategic direction and give logical points on where costs are likely to incur and benefits realised.Cloudsourcing does offer some key characteristics and benefits, which can be difficult to realise in more traditional IT delivery models: Speed to market Extensive virtualisation allows service providers to quickly provide additional resources when required to meet increasing business demands or growth in new markets. Remote access The nature of Cloud technology means it is provided across the internet, allowing easier migration from existing distributed delivery models to consolidated shared service centres. Operating Expenditure (OpEx)-based cost model Utility-based charging models allow expenditure for technology to move from the bottom line. The need for depreciation and amortisation is significantly reduced. Greater choice Theoretically, Cloud offers a greater selection of tools in the market since the best of breed enterprise solutions will now become accessible to smaller players due to there being more pragmatic licensing models based on use. Integrated technology and human resource models By selecting the correct vendor, it is possible to expandthe pay as you grow model to people as well as technology, thereby establishing a very dynamic andfluid operating model.Utilising the Cloud as a platform, however, also has its fair share of risks, and it is recommended that an organisation seeking to adopt such a concept should carefully consider whether the model works for them. Points to consider include the following: Multi-tenancy The lines between different customers within a Cloudsourcing provider are often blurred. So it is imperative, as part of the selection process, to be aware of the company you are keeping. Data sovereignty Many providers operate across multiple jurisdictions, so controlling where information resides can be exceedingly difficult. Yet, this is extremely important for those operating in regulated industries. Security and privacy Whilst many providers will have exceptionally superior solutions to manage security and privacy compared to some of their customers, it is difficult for adopters to trust them without some degree of assurance and evidence. Stakeholder buy-in and organisational support Adopting a Cloudsourcing-based model is an extremely disruptive transformation and re-engineers every aspect from IT budgeting and investment through to human resourcing principles and operating models. Do not underestimate the time required and the impact when initially implementing a Cloudsourcing solution.Cloudsourcing1 Cloudsourcing: in the future the combination of cloud computing and SSO will have a profound effect on EA, CIOWhat is happening in China? The Chinese government is planning on investing USD 154 billion by 2014 to develop Cloud Computing centres.Companies such as Alibaba and Tencent have already built the Chinese equivalent to Google and Amazon and more companies continue to develop. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 6 An outcome-based model accelerating innovationWhile Crowdsourcing is not a new idea, it is innovative to formalise it as part of a business model. Crowdsourcing is where an organisation draws on public input to complete business-related tasks that it would normally perform itself, or for which it would engage a third party. Crowdsourcing is utilised by organisations in addition to their SSO strategy. An organisation posts a brief and asks for a response according to a specific timeline and format. It is a shift from a labour-based model to an outcome-based model. The advantages are that it eliminates a single point of failure, and accelerates access to extensive innovative ideas. It is a business model that can provide thousands of ideas at a fraction of the cost, assuming the pool of participants has been appropriately selected and managed. Access to a breadth of talent and a fexible workforceA key benefit of the model is a clear scope of work with defined spend as labour is not being charged by the hour, control over cost can be exercised more easily. Also, since the model is project-based and participants are engaged only when required, there is an increase in workforce flexibility. CrowdsourcingUnsourcing is where an organisation sets up online communities to facilitate customer to customer support. The purpose of this is to free resource capacity, improve customer response time and ultimately cut costs. It leads to the creation of customer service communities. This model takes advantage of a larger resource pool in order to provide quicker support to fellow consumers.Organisations are already utilising this model. For example, when TomTom, a maker of satellite navigation systems, switched on social support, members handled 20,000 cases in its first two weeks and saved the company around USD 150,000. Best Buy, an American gadget retailer, values its 600,000 users at USD 5 million annually.2Organisations need to entice consumers to participate in such activities. Gamification (i.e., addition of game-like reward mechanisms to interactive processes to drive involvement or completion by participants) is now more commonly being utilised, which rewards customer participation. It is important to note that there are restrictions in what can be outsourced through a social media support model, e.g. processes with private information (including billing). The model must also be closely managed to facilitate positive interaction and minimise negative comments that may damage the brand. Unsourcing2 SSO is so last year, The Economist, 11 May 2012In summaryTraditional SSO models are evolving as organisations test and implement new concepts that enable them to surpass business challenges in a constantly changing economic environment. These new concepts lower the barriers of complex provider relationships and customised processes. Several organisations have already implemented these concepts, proving that while implementing them is challenging, they can provide competitive advantages, agility and flexibility in managing the organisations customers, costs and services. However, they also bear significant risks and challenges, which must be carefully considered.Is this in China?Chinese crowdsourcing websites such as Zhubajie and TaskCN already have 4 and 2.8 million users respectively Crowdsourcing is growing in China. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 7 |Shifting to Strategic Shared Services and OutsourcingWith so many factors impacting upon the SSO model today, it may be hard to accurately pinpoint where innovation can be used successfully. Organisations need to somehow capture all their unique external influences and challenges and determine how to successfully navigate this fluid landscape.Innovation is not just about using the latest gadget or the newest tool. It is defined as the creation of better or more effective products, processes, services, technologies or ideas that are already available to markets, governments and society. 3 In the context of SSO, we need to understand how external influences and challenges will affect components of our business model and operating model. From there, we can picture how innovation (enhancement, value-adding and creation) in SSO can help our organisations. BusinessModelServices,functionsand processesOrganisationand governanceTechnologyPeopleand skillsSourcingand locationPerformanceManagementKPMG defnes the elements of the business model as follows:OPERATING MODELServices, functions and processesThe functions and processes model shows how various functions interact, how services are delivered and how processes are executed.Organisation and governanceThe organisation and governance model outlines the organisational and governance structure.TechnologyThe technology model outlines the services, applications and infrastructure supporting the organisation.Sourcing and locationThe sourcing and location model defines sourcing, offshoring and location configurations.Performance managementThe performance management model shows the key business performance metrics and measurement processes required.People and skillsThe people and skills model outlines the people implications in terms of the skills and behaviours required.RevenueType of revenue, pricing, product & channel mix, contribution and margin.CostCost to serve, overheads, external spend, cost of capital and risk.CapacityProduct and channel volumesPeople: Full Time Equivalents (FTEs).BUSINESS MODELMarkets, customers and segmentsTarget markets, customer segments and their needs.Products and servicesValue propositions; products and services offered to target segments.ChannelsThe means by which a company delivers products and services to customers.ECONOMICSApplication to existing business models3 _http://en.wikipedia.org/wiki/Innovation 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 8All of these parts need to be considered if we want to drive innovation across our organisations and standardise the way that we implement SSO in our organisations. But what are our options?We need to look at the drivers, delivery models and concepts available to us. Below are some examples: Example DeliveryModelsDescriptionCo-source A shared service centre exclusive to a firm, but owned and run by a third-party vendor.Captive A dedicated shared service centre owned and run internally within a firm.Joint Venture A shared service centre with equal or near equal ownership by the firm and a third-party vendor.Outsource An outsourced centre in a facility, 100 percent owned by a third-party vendor.Concepts DescriptionUnsourcing Unsourcing allows customers to answer each others service questions on social media platforms.Crowd-sourcingThis involves outsourcing tasks to a distributed group of people who are not paid company employees.Cloud This involves running a function or process utilising Cloud technology.Rightsourcing This is the movement of resources back to a near shore location.Drivers DescriptionAgility A centre that can respond to multiple countries, allowing resources to be shifted, if necessary, in response to changing client needs and circumstances.Performance The enhancement of an existing product or service.Cost Finding a lower cost solution for a current operation or new service.Regulatory The impact of guidelines circulated by local country regulators. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 9 |Shifting to Strategic Shared Services and OutsourcingBy selecting a driver and combining this with a relevant model and concept, we can create new and innovative ideas for SSO operations. We then need to understand the impact on the components of the business model and how the organisation is run. As discussed, this does not necessarily need to involve bleeding edge technology, but given the level of reliance that organisations have on technology, it will certainly be an enabler.By combining these elements, we can create an innovation equation:Example combinations: The driver is the focus or objective. We need to link relevant delivery models and concepts in order to create innovation. KPMGInsert text hereInsert text hereInsert text hereCost Outsourcing CrowdsourcingLow-cost source of new ideas and solutionsBUSINESS MODEL ECONOMICS OPERATING MODEL Develop new service channels Develop a cost model and pricing structure Build new governance and monitoring processes Develop vendor management capability Use differing technology platformsBUSINESS MODEL IMPACTDRIVERDELIVERYMODECONCEPT INNOVATION 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 10All of the models discussed and the techniques highlighted in and around innovation within SSO boil down to a finite number of factors: More than ever, SSOs agility and success may rely on the ability to adapt to internal and external client needs, as well as introduce new products and best practice. Embracing best practice such as Six Sigma will continue to be a prerequisite within the industry. The SSO market generally needs to continually focus on operational efficiency to drive costs down.Certain combinations will lead to new products and solutions. However, each option will have ramifications on the business model and how organisations go to market. If you have an existing operation, you may need to rework or move elements of your models and concepts in order to meet these differing drivers and objectives. Communication is fundamental within operations; innovation must occur within both the provider and user organisations, and these solutions need to be jointly agreed upon and implemented. Organisations should think carefully about their SSO model and combinations, as they will all impact the business and operating model. As an outsourcer, innovation can and will allow you to distinguish your organisation from the competition as well as create demand. However, organisations need to focus on examining combinations of their current operations to create value, rather than automating a process and implementing technology solutions.Insert text hereInsert text hereInsert text herePerformance Captive Unsourcing Immediate, low-cost solutionBUSINESS MODEL ECONOMICS OPERATING MODEL Establish different communication channels Less price-sensitive (low cost) Utilise gamification concepts (incentives) Implement new service and new service teams Use different technology platforms Formalise performance monitoring to police content Consider risk and legal impact, and monitor closelyBUSINESS MODEL IMPACTInsert text hereInsert text hereInsert text hereAgilityJointVentureCloudUtility-based operationsdelivering a fexible solutionBUSINESS MODEL ECONOMICS OPERATING MODEL Develop new service channels Evolve new product offerings Develop new pricing model New contracting may be required Address risk and compliance concerns Consider different skills and capabilities Consider different/low-cost locations which may be more feasibleBUSINESS MODEL IMPACT 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 11 |Shifting to Strategic Shared Services and OutsourcingWhile innovation can bring about a step change in SSO operations, not all organisations are ready for it. Just as the internet acted as the catalyst for the huge growth in outsourcing during the 1990s, advents in technology and the maturity of SSO service delivery know-how is changing the way business services are procured and delivered. As discussed earlier, cutting edge technological and service delivery changes to the SSO model are bringing about a fundamental shift in business practices and creating real innovation. However, for the majority of organisations, we have observed a continued evolution of service delivery towards global business services (GBS) in the near future.The explosion of outsourcing during the 1990s was driven by a desire to reduce back-office costs through relatively straightforward labour arbitrage involving low-cost locations. The internet boom and the improvement of the cost and quality of global telecommunications broke down geographical barriers. Consequently, this led directly to the development of large SSO markets in predominantly English-speaking countries that had cheap labour pools of skilled workers that continued to grow.In addition to cost reduction, organisations and the buyers and users of SSO services saw the benefits that working across time zones could deliver, for example by extending IT helpdesk support hours. Back-office functions such as accounts payable (AP), accounts receivable (AR) and IT support were initially the main focus for SSO organisations, but these were expanded into customer-facing voice services (call centres) and other business process services, and more complex IT-related services, as confidence in service quality increased. The snowball effect has now kicked in. Today, senior management looks upon SSO as an opportunity to optimise processes and adopt best practices, and, as a result, are achieving more robust commercial models. It is worth mentioning that the service provider landscape has flourished during these times in terms of location, innovations in offerings offering focused solutions to the local and global market, for example providers such as HiSoft and Bleum flourished in this environment.However, amid the burgeoning changes, it appears that cost reduction remains a key driver in SSO decisions although organisations increasingly realise that in order to be successful, they need to look beyond the cost factor and extract more value from their SSO strategy.Evolution 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 12Bleum Inc., a China-based systems and software outsourcing development company is pushing the outsourcing boundaries, achieving maximised business value for their clients.Eric Rongley, Founder and CEO of Bleum, shared his insights on the managing Bleum and trends of strategic outsourcing.Their success is based on two factors:How they recruit talent: There is a three step recruiting process that includes online testing, English language testing and behavioral testing. The tests are extremely selective (minimum IQ levels of 130) ensuring the best and most appropriate are hired.How they manage their talent: Bleum ensures that their people are culturally aligned and strives to create a fun, working environment. They even go as far as to ensure a balanced female to male ratio. Bleum also provides English tutors to ensure the English language standard of their staff continues to improve. Bleum has a strong culture of transparency and aim to achieve a high level of visibility with clients. Their motto is to be completely transparent.They have taken this one step further, leveraging bespoke communication tools to enhance the customer Evolving to strategic outsourcingexperience.Hydra acts as a customer portal and has its own instant messenger system Bleum buddy as well as video conferencing facilities. TrendsEric believes that as it continues to become anincreasingly flat world, we will continue to see more IT services and KPO being outsourced. An example is the processing of X-Rays in India. Services in engineering may also become more popular.Location is important from a margin and retention point of view and will grow in importance. Bleum is currently looking at other locations and countries (in addition to Shanghai and Chengdu) as they need to build availability across all three time zones. Nearsourcing as a trend is also growing as clients look to bring work back into the local market.Clients would like to reduce the number of vendors and would expect more consolidation in the market. They would prefer a multi-sourcing environment.ConclusionEric agrees that pure price play is no longer a sustainable model. Success will be determined by how clients and service providers achieve better outcomes and access to talent and build strong forward looking partnerships. Case StudyEric Rongley, Founder and CEO of Bleum 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 13 |Shifting to Strategic Shared Services and OutsourcingKPMGs Global Business Services (GBS) ModelAs organisations evolve, it may be helpful to bear in mind the KPMG GBS maturity model illustrated below.This model defines five levels of maturity, ranging from suboptimised to differentiated. The assessment and measurement of service delivery maturity should occur across a range of operating categories such as thus discussed below.Areas of consideration and lessons learned to move up the GBS Maturity ModelMany organisations are rapidly gaining GBS maturity, but this is occurring at different levels across functions and geographies; it is also based on the different overall organisational operating models. There is no doubt that while organisations want to progress their SSO, moving up the maturity curve is hard. Organisations often get stuck below their desired level for a variety of reasons. Here are some considerations and lessons learned from our observations.The Journey... Development stages... TimeValue capture and perfromance sustainabilityLevel 5 - DiferentiatedGlobally integrated service portfolio with aggresiveuse of altenative and mixed delivery modelsLevel 4 - StrategicOptimised balance of internal and external deliverycapabilities, global sourcing with multifunction focusLevel 3 - OptimisedTraditional outsourcing relationships with global delivery,non-integrated internal shared services capabilitiesLevel 2 - RationalisedSingle function shared services with tactical onshoreor ofshore provider relationshipsLevel 1 - SuboptimisedDecentralised and duplicative functions; little centralcontrol over business support servicesIn just three years, Schneider Electric has fully integrated the finance and accounting function of 35 legal entities across China and North East Asia using a Shared Service (SS) model. Nora Jiang, Director, Finance Shared Services Centre China & NEA of Schneider Electric, has been at the forefront of this journey and shared some insights into how Schneider got there. The traditional pick up and drop model was successful in the past. However, businesses like Schneider are transforming to be more end-to-end process driven, lean, and consistent between legal entities.Nora identified four pillars that contributed to Schneiders evolution: training, clear and transparent Service Level Agreements (SLAs), continuous monitoring and improvement, and leveraging technology to minimise manual intervention.Schneider has consistently offered internal training to its staff and externally to end users at various legal entities throughout the transition. This has helped to instill the Reaping maximum benefts from Shared Services by evolving continuouslyCase StudyNora Jiang, Director, Finance Shared Services Centre China & NEA of Schneider Electric 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 14Strategy Organisations have always looked at their SSO operations strategically to assess how they could derive maximum benefit.As mentioned, the trend of moving away from pure cost reduction as a measure of success is continuing, with a growing focus on defined business outcomes such as customer satisfaction, service innovation and go-to-market lead time. Organisations may look into new value levers including innovation and business insight, and a more sophisticated organisational model including stronger governance and end-to-end process ownership While innovative SSO concepts such as Crowdsourcing or Unsourcing are receiving increased attention from corporates, the ability to integrate multiple delivery models and aggregate services from its shared services and service providers is fundamental for todays forward-thinking organisations.A longer-term visionContinuous improvements across different areas such as the level of standardisation and process efficiency become more of a focus as organisations evolve and grow in maturity. All these require a well planned road map with sequencing improvement strategies. The more mature organisations tend to set out a vision to guide everyone throughout the SSO journey. In addition, regular health checks and reviews of the degree of realisation of the target benefits should be carried out. This helps management monitor how the SSO strategy is being executed and allows them to step in at the earliest possible moment, if required. process into the mindsets of the users and staff. By offering training to all legal entities for new tools and services, it helps institutionalise the process into business as usual.Equally important are clear and defined SLAs, especially in China, where regulation requires precise terms and conditions. Schneider adopts a top-down approach where service principles are defined globally and details are always vetted and agreed upon with all legal entities. Furthermore, KPIs are measureable, defined in SLAs and regularly reported to maintain transparency. Unique at Schneider, management uses monitoring to drive continuous improvement rather than treating it as business-as-usual activity. There are frequent meetings to identify improvement areas after which solutions are implemented. Feedback from service desks all the way to customer satisfaction surveys are used to continually review and refine the service.Schneiders technology has also been upgraded to make straight through processing possible. Examples include paperless scanning with OCR technology, system integration, straight through payment processing, and e-filing retention system. Schneider has found that the use of technology has increased security and efficiency, and freed up the team, allowing them to deliver more value-added services. Schneider has reaped multiple benefits throughout this journey. However, after three years, Noras team is beginning to shift its focus, and is now looking at how other parts of the business may benefit and complement this model, such as treasury and management information reporting. Recognising the additional potential SS can bring, Nora will continue to evolve the four pillars to support Schneiders future expansion. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 15 |Shifting to Strategic Shared Services and OutsourcingSSO industryTrue global players have evolved over time in the outsourcing market. These providers are being forced to adapt their business models to deliver the flexibility that the market demands. There has been a significant increase in small niche players often using Cloud as a delivery platform. The industry is likely to see a period of consolidation, as successful providers grow and absorb smaller players. As organisations look to agree to shorter term contracts with the ability to vary demand, scale will become important for providers to absorb fluctuations in demand. Service aggregators providers who manage a number of smaller providers to optimise performance are becoming more important. We have seen this in the China market, the most recent being the HiSoft and VanceInfo merger.With the resources, facilities and infrastructure available, we will see China developing more key market players that embrace these technologies.TechnologyCloud technology has fundamentally changed the way IT and business services are designed, packaged and delivered through SSO models. This has helped to level the playing field and has encouraged the blossoming of new entrants to the market, mostly specialists with industry and/or functional expertise in parts of the entire business value chain. Organisations are now able to consume services in ways unimaginable in recent years. Enterprises can procure SSO services on a modular basis from a wide range of providers, including their shared service organisations. Rather than outsourcing a variety of work to a single large provider, as has previously been the case, enterprises are now starting to use multiple providers for individual services where they have specific expertise and differentiation. A company can also choose to conduct its business on a third-party business platform that resides somewhere else, rather than investing in its own IT infrastructure and building or implementation applications. One of the success stories is Salesforce.com, which offers a standardised, yet function-rich sales and customer management application over the internet at a relatively low cost, with no capital investment required.Pricing Recent data on contract sizes (i.e., total contract value) indicates that the mega-outsourcing deals of the mid-90s are diminishing quickly in todays market, as organisations are looking to enter into short to medium term, flexible deals that would allow for services to be turned off/on with relatively little pain as business needs and the macroeconomic environment change.From a pricing viewpoint, shared services and service providers have gained maturity in pricing their services on a transaction basis for some conventional IT and business process services, having accumulated sufficient historic operational data as well as mastering the art of determining their risk exposure over the years. Examples include account payables/ account receivables (AP/AR) transactions and IT application support. In some cases, the transaction pricing models further evolve with the smart use of Cloud technology, virtualisation and SSO models. This results in a gamut of utilities and as-a-service offerings that help turn the spend from capital expenditure (CAPEX) into operating expenditure (OPEX) a valuable and welcome tool for todays Chief Financial Officers (CFOs) and business owners with diminishing budgets. For non-transactional services, pricing is seen as moving towards rewarding specific outcomes, for example by incentivising the SSO organisations to improve processes or giving bonuses for new patents registered in the case of research and development (R&D). In the shared services arena, there have been parallel developments resulting in more flexible and transparent chargeback mechanisms for business users.What does this mean for China?The Chinese government is planning to invest USD 54 billion in Cloud infrastructure in the next 5 years. To foster this growth, there are already five Cloud cities in China with 20 more being planned. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 16ServicesOver recent years, the range of organisational services provided by SSO has proliferated and moved up the value chain. Complex services requiring deeper technical skills and specialisation such as R&D or software development have evolved. SSO is increasingly part of the value chain of front-office services, with service providers contributing directly to the delivery of products and services. The trend of organisations spinning off their service centres as independent commercial operations has also developed; organisations now see the development of internal focused service centres as the first step towards creating new business lines. How has this emerged within China?By 2011, China had more than 1,200 R&D centres set up by multinationals. China accounts for 12.9 % of total global R&D spending in 2011, ranking as the second largest R&D investor globally. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 17 |Shifting to Strategic Shared Services and OutsourcingLocationChina became the number two destination for SSO during the 2000s and continues to push and evolve the market. As drivers other than cost become relevant to SSO, decisions around location become more complex. Outsourcing and/or offshoring remains as politically sensitive as always, but Nearsourcing is driven by wider factors than just avoiding negative press. Organisations feel that some services are delivered more effectively locally, in local time zones.Moreover, decisions about where to locate a service centre may be influenced by plans to enter a new market e.g., many organisations use the setting up of a service centre in China as the first step to expanding their business into the Chinese market. PeopleThe war for talent is now truly global. SSO is seen as a means of tapping into talent pools around the globe. Major MNCs have invested heavily in R&D and technology facilities in emerging markets. In addition to meeting the local demand for products and services, this is also about attracting and developing new talent.4 Technology, particularly social media, is starting to be utilised as a means of bringing a global workforce together. GovernanceA perfect plan for a sourcing strategy requires a developed governance structure and a high degree of commercial orientation to support the implementation. Sometimes, there might be complex initiatives across the organisation and therefore a robust governance structure is one of the keys to success. A commercial mindset brings SSO into a new perspective to best fit the business needs across the organisations.Governance models are also evolving from being functionally led to more centrally managed, so as to oversee the overall SSO model as it becomes more complex and challenging to manage. This has created new roles and resource requirements In the future, we may see key senior management start to run the SSO functions, as the operational power, which runs the core operations of the business shifts to these centres. Conversely, we may also see emerging talent from the service centres themselves to potentially become future business leaders. However, we have not seen this so far. As a key outsourcing service provider in the market, Hewlett-Packard (HP) is moving towards more strategic outsourcing, in terms of the services they provide, the way they manage the relationship with customers, and the way they identify and develop business opportunities. Peter Fishwick, Strategy Development Director of HP, shared his insights on the evolution and trends of strategic outsourcing.Changing business environment drives strategic outsourcing needsChanges in the business and economic environment are driving the consideration for outsourcing beyond cost saving. An example is the financial industry since 2008, regulations have tightened, and financial institutions need to review and adapt their operations to satisfy various regulatory requirements, such as customer privacy, data security and regulatory reporting. CIOs may also now need to spend up to half of their time dealing with regulators and auditors. However, IT departments often lack the capacity to innovate and adapt to these challenges. Organisations realise they cannot tackle all these challenges alone, and have started to partner with external service providers to seek solutions. When thinking about outsourcing, 4 Stars vs Drones: Workers of the world are divided, Financial Times, 13 February 2012Evolving tostrategic outsourcingCase StudyPeter Fishwick, Strategy Development Director, HP Enterprise Services 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 18Insourcing, the next wave?Since the 1990s, organisations have used outsourcing as a tool to move cost around. Recently however, some senior management have begun to question whether they should bring certain outsourced business processes back in-house (insourcing). The swing may not be apparent, but there have been a few recent cases where businesses see insourcingas upskilling, bringing core business understanding back into the business. However,there is no concrete evidence that it is becoming mainstream.The key differentiator of success will be how organisations apply the options available to their set of business challenges and specific business model.However, it is an exciting time for SSO, and this industry, like no other, is embracing innovation in its evolution.key considerations are shifting from simple cost control towards operational excellence and agility the ability to out-pace competitors in the delivery and innovation of services and products is a competitive edge that companies expect outsourcing to bring. Developing business opportunities through strategic conversationsWhen companies are thinking more strategically about outsourcing, service providers need to be up to speed. In the old days you were only talking to CIOs and CFOs. Now you need to be able to talk to business people across various functions, and you need to know a lot more about the business. SS&O is now, more than ever, a business decision.As new technologies are springing up faster than ever, concepts such as Cloud, Big Data and social media have become the hottest buzzwords, but few companies really understand what all these mean, and what they can bring to the business, and even fewer have real adoption plans ready. Service providers need to be able to talk the business talk with C-levels keep away from complex technology jargon, and use simple business terms and that is the key to monetising the new technologies. Location choice moving beyond AsiaTalking about outsourcing destinations, Peter sees a trend that many companies, mostly from European and North America, are moving out of Asian countries like India and China, towards emerging locations such as Eastern Europe, South Africa, Egypt, and Morocco. Well educated talent and cultural and language proximity are some of the reasons for the popularity of these locations. Asian MNCs, however, still prefer staying within Asia, and look to lower-cost alternatives such as Vietnam, Indonesia and Laos.ConclusionThere is no magic formula for success in outsourcing. Being strategic is all about bringing innovation into the consideration of the basic questions what, when, where and how to outsource. For service providers alike, as well as for organisations considering or utilising outsourcing in their business operations, the experiences and insights from HP will no doubt shed some light on how to take outsourcing to the next level. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 19 |Shifting to Strategic Shared Services and OutsourcingChanges to the scope of services for the SSO model are intrinsically tied to the evolution of the SSO model. There is often a linear relationship between the increasing complexity of services provided by a shared service centre or service provider and the maturity of the SSO. As organisations and service providers push these boundaries, innovative solutions can arise, resulting in new models of partnership and engagement with all stakeholders.When considering the question of what to outsource, organisations have started to think beyond cost arbitrage. As organisations move up the maturity model, the services they require are more sophisticated and comprehensive. The emergence of new social trends, such as the proliferation of social networks, is bringing new demands to the outsourcing realm. Service providers growing capabilities underpin this service scope expansion. All these factors have an impact on services that organisations are considering outsourcing.Big Data analyticsOrganisations are dealing with an ever-increasing volume of data generated through social platforms, search engines and numerous consumer-facing websites. This mass of information started to accumulate a few short years ago with the proliferation of social networks and smart phones. It is known as Big Data, and is posing both a major challenge and providing huge opportunity for organisations globally. The seemingly unstructured data may include incredibly valuable conversations around brands and products, and how consumers feel about and interact with them. How much and how fast one can make sense of the data and make sound management decisions based on this data will become a key differentiator between success and failure. Most organisations, however, are not ready to reap the potential benefits of Big Data. According to Gartners prediction, more than 85 percent of Fortune 500 organisations will fail to handle the technical and management challenges, and may not be able to effectively exploit Big Data for competitive advantage until 2015. Many organisations simply do not have the scale of infrastructure and resources. Significant investment in the expansion and modernisation of information infrastructure, staff with analytical skills and management that can make decisions based on analytical results, and the ability to build infrastructure and acquire talents in a short time, are required. The infrastructure and specialised talents requirements for Big Data analytics make it a prime candidate for outsourcing/offshoring. Most Big Data outsourcing today takes one of these three forms: 1. Firms that help organisations design, deploy and manageBig Data systems2.Firms that help organisations build custom algorithms andapplications to analyse data3.Firms that provide some combination of engineering,algorithms and applications and hosting services.While the data is there, the key to success is what organisations can get out of it, based on what they want. It is the information strategists who have to understand what they require from Big Data and how that information could be utilised before Business Process Outsourcing (BPO) providers can deliver the true value of Big Data analytics to their customers.Whats next? 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 20Supply chain managementThe early days of supply chain management outsourcing focused on offshoring simple shipping and receiving tasks to enjoy cost arbitrage. As the complexity of supply chains increases, modern supply chain management is looking beyond cost reduction to aim for better visibility of processes, as well as agility to react to market changes. Organisations are turning to their BPO providers to provide insight and responsiveness. As an important part of the supply chain, procurement process outsourcing has gained momentum in recent years. KPMGs Q1 2012 Sourcing Advisory Global Pulse Survey found that in Asia Pacific and specifically China, procurement/source to pay is among the top functional areas of outsourcing demand, with strong growth expectation over the next 12 months. Organisations are starting to consider outsourcing direct procurement functions, such as sourcing raw materials, components and parts for finished goods, as well as indirect procurement functions, such as sourcing maintenance, repair and operating supplies. SummaryThere may be new service offerings (e.g. Big Data management) where knowledge and capability do not currently exist in the organisation but can be provided by a specialised service provider. It may be a quicker and cheaper alternative to source these capabilities externally than to build them from scratch internally. Traditionally, the service scope in SSO has evolved from high-volume transactional services to more complex bespoke services. As shared services and service providers develop greater capability and technology sophistication, as the talent pool develops the requisite skills, and as organisations become more comfortable with the SSO model, organisations have the option of leapfrogging these factors and placing more complex services in the SSO from the outset.Social media managementSocial media has only become a mainstream means of interaction among individuals within the past five years. It has been used commercially as a means to manage customer relationships for even shorter. Following the increasing popularity of social media as a communication channel, the format of customer services is evolving.The changing customer interface preference begs the need for change in one of the most traditional BPO services call centres. Voice services may no longer be dominating; instead, multiple means of communication, such as voice, email and instant messaging, and social media platforms like Twitter, Facebook and Google+, will be integrated as a holistic communication channel to provide customer services. Call centres may ultimately be replaced by contact centres, where savvy staff will keep customers happy and engaged through social networks, and quick-reaction teams will be ready with a strategy and response to potential public relations issues around the clock.Is this relevantto China?China is the worlds biggest social media market and this has created a wealth of domestic social media sites such as Weibo, Renren and YouKu.This means that the next generation, like the West, will use this medium as their key method of communications - creating opportunity for SSO. How will this impact China?The Chinese government has recognised this and are investing in the service industry in alignment with the 12th Five-Year Plan though education, direct and indirect investment, the development of infrastructure and the creation of policy to promote import and export services.The China-to-Chinamarket is expected to be the fastest growing segment in the coming years as Chinese SOEs & POEs start to recognise the benefits of SSO and become more open to such opportunities. With the massive scale of these domestic buyers, market potential is huge. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 21 |Shifting to Strategic Shared Services and Outsourcing5 Uncertain sourcing strategy? Keep options open with flexible outsourcing agreements, KPMG, July 20126Time to get past the stigma of offshoring, Financial Times, 9 July 20127 Ibid footnote 28Ibid footnote 1As we have discussed above, the way SSO will evolve is not a question about the industry, but rather about how organisations themselves will develop and what impact these changes will have on SSO.The notion of a single organisation providing products or services entirely from within its own four walls is fast becoming outdated. Whilst this model may be commonplace within industry and consumer products where supply chains are complex and multilayered, this model does not seem to be the norm in SSO.Organisations will form dynamic, temporary collaborations between different companies, public organisations and people that are unified around a single enterprise, be it a new product or delivery of a particular service.This step change in how business is done will require and be driven by advances in technology and changes in behaviour around how business services are utilised. The extended global enterprise (EGE) is KPMGs concept of the next level of maturity in global business services. This involves integrating various capabilities whether retained, outsourced, shared or distributed around the world into seamless, end-to-end processes that drive specific business outcomes.5

Under this model, where work is done and by whom let alone what it is called (be it offshoring, outsourcing, near-shoring or best-shoring) doesnt matter. What matters is whether the company is managing the collaboration in a way that brings the greatest benefit.6 Organisations will look to business services companies to deliver more than just transactional services. They will look for business services providers that can deliver qualitative services with a commercial orientation that drives value for the business.7This move away from cost reduction being the primary driver of SSO is already happening, but under an EGE model, organisations will use multiple service provider types to deliver products or services to their customers. This change in the concept of value will require organisations to take a different approach to measuring the success of their business services that goes beyond mere cost reduction and process efficiency towards the value added to the enterprise. The requirement for efficient, cost-effective transactional services will not disappear. Such services will become more commoditised, allowing the receiving organisation to simply focus on the what rather than the how of what is delivered.This will allow the organisation to focus on achieving its own desired outcomes. Relationships between different business services providers will become increasingly collaborative, with the purchaser and supplier relationship becoming more akin to a true partnership, as both parties will be working towards achieving a common outcome. Providers of business services will be a diverse mixture of private and public organisations, employees, consultants and independent individuals (for example, customers) spread around the globe. Organisations will continue to move away from functional ownership. In an EGE, no single function owns a process. Rather, functional leaders become stakeholders who help set the strategic direction, while process owners work across functions.8

What will the extended global enterprise look like?The end state extended enterprise global model 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 22Crowd-sourcingProvider relationship complexityHIGHLOWLOWHIGHStandardisationof processesBusinessprocessas a utilityCaptiveservicecentreCloud-sourcingCentralisedservicesUnsourcingOutsourcingCo-sourcingJointventureExtended GlobalEnterprise There will be a change of focus for all services towards customer needs rather than organisational structure. The flexibility of Cloud-based technology will allow business services to be provided on an on demand basis. Organisations will not be constrained by infrastructure or technology as they will be able to access these via services companies. Social media technology will become increasingly prevalent in the workplace, allowing employees to collaborate and share information seamlessly across borders and between different service providers on a single platform. Information generated within the platform will become content archived within that platform (via the Cloud), allowing the organisation to retain the intellectual property generated by the different business services providers, whether internal or third party. A strong governance structure will need to be created to manage the demand for business services. Management will need to effectively govern an increasingly complex and dynamic organisation. Independent standards, such as ITSqCs eSourcing Capability Model9 will become important as organisations seek standards to apply to diverse and complex processes.How will this be achieved?9The eSourcing Capability Model was developed according to a framework developed by ITSqC at the Carnegie Mellon University and sets out the framework of best practices associated with successful IT-enabled sourcing relationships. Supporting processes will start to become standardised to increase efficiency and reduce complexity. This will make it easier for the enterprise to maximise its use of business services through strong central demand management. The diagram below illustratesthe EGE model: 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 23 |Shifting to Strategic Shared Services and OutsourcingRegulatory complianceThe ability to transfer business processes offshore is subject to regulatory and legislative constraints. Some regulations apply to all industries such as data security and protection, and labour laws. Others relate specifically to the industry and are governed by regulators, e.g., banking and insurance regulations. In terms of SSO, organisations need to understand which regulatory requirements are relevant to their SSO operations and the business processes they propose to transfer. This can help determine if SSO is possible, if the processes can be transferred and the ease of doing so.This is a challenging area for organisations due to the: Potentially large scope: Organisations need to assess regulations for all in-scope locations, i.e., those where business processes proposed to be transferred are located, as well as the proposed location(s) of the shared service/outsourced centre. Difficulty in understanding regulations and requirements: The regulations differ in terms of availability and clarity across different jurisdictions and have different implications. Industry-specific regulations may or may not state specific requirements for enabling offshoring or outsourcing. For example, the Monetary Authority of Singapore, which regulates banks and insurance organisations in Singapore, provides specific guidance on the requirements for offshoring and outsourcing. However, the Hong Kong Monetary Authority is less specific with its guidance. In all cases, direct interaction and consultation with these local industry regulators is required to clarify requirements and ensure these are met before the transfer of business processes.Gartner estimates that the outsourcing market will grow about 4 percent annually from 20112015.10This excludes growth of both domestic and offshore shared services, which continues to outpace that of traditional outsourcing according to KPMGs Q1 2012 Sourcing Advisory Global Pulse Survey of sourcing service providers.It is evident that more organisations are continuing to utilise SSO to reduce costs, increase efficiency and manage the challenging economic environment. While substantial benefits can result, implementing SSO involves substantial risks and challenges. Understanding these risks and challenges and considering them against the organisations risk appetite will affect the service delivery model, its location, method, costs and plan of implementation. This section raises the top three issues that organisations embarking on an SSO journey should carefully assess: Substantive requirements: As SSO tends to involve consolidating business processes from different locations into one or a few locations, organisations need to consider how they will effectively meet the different requirements in order to successfully implement shared services and/or outsourcing. Organisations need to plan to complete these before the transfer of the processes.Failure to meet regulatory requirements can result in the rejection of the proposed SSO; or in serious penalties from the regulator and/or instructions to dismantle the offshore/outsourced services if the offshore and outsourced centre is already set up.10 Gartner, Inc. Forecast: IT Services, 2008-2015, 2Q11 Update. 16 June 2011With declining markets and organisations looking for tools and ideas to cut cost and look for new ways to deliver services, it is no surprise that businesses are looking to SSO as a possible answer.However, the market is a little off kilter, says Mark Parsons Partner at Freshfields Bruckhaus Deringer.Business in ASPAC is quite conservative in this space. More often than not, there is a global top down push for SSO.Sourcing and outsourcing & innovationCase StudyMark Parsons, Partner at Freshfelds Bruckhaus DeringerChallenges 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 24Data security and protectionAs business processes are transferred to an SSO, the associated data also needs to be transferred and secured. These challenges are often resolved at the last minute, resulting in higher costs and suboptimal solutions. They also increase the prospect of regulatory intervention.Risks are often higher when transferring to a service provider, as this involves transferring data to an external third party that typically services multiple customers from the same location. This creates concern about whether valuable and sensitive information is inadequately protected.Organisations need to ensure that sufficiently robust security practices are put in place. They should consider the financial penalties for security violations and other measures, such as infrastructure security dedicated servers, service firewalls, anti-virus applications, physical facilities security, password control, data encryption, hacking detection and prevention measures; and human resource security pre-recruitment background checks and the signing of nondisclosure agreements. The additional challenge lies in embedding these in the outsourcing contract and monitoring that the service provider enforces these procedures.If customer or employee personal data is to be transferred, there needs to be further consideration about whether this data can be transferred inwards and outwards freely, if it is held securely, and whether it will only be used for the purpose intended. Data privacy laws protecting personal data could prevent and restrict the offshore transfer of such data. These laws impact on whether business processes can be transferred offshore and where they should be located.For example, Chinese regulation states that the personal financial information of Chinese citizens cannot be transferred or processed outside of China. Therefore, business processes that involve personal financial information such as bank details cannot be transferred to a different location. Organisations may also choose not to transfer processes to a jurisdiction with limited regulations on data privacy, as they need to ensure their employees and customers data remains protected.If not considered carefully, data issues can delay implementation or even require a fundamental rethink of the structure of the data processing activity. Organisations need to involve their legal and compliance teams to ensure they thoroughly understand the local data privacy laws, and the implications of current and future locations of their business processes.such as virtual teams.These give real flexibility and access to a broad resource pool, however, culturally and logistically, the Asia market does not appear to be there yet, with many companies preferring to physically see their employees.Further, regulators are still working through possible cross border and privacy challenges created by remote access to systems and data.The regulation and technology needs to be able to move at a similar pace for this to really work and we continue to see many regulators struggling to understand what is achievable in terms of current technology.ASPAC is at an interesting point in time. Historically, reactionary moves in Europe have inhibited innovation especially around data privacy.What we do know is that there is a strong push towards work-life balance and the use of outsourcing to assist in this push.This will drive governments to lean towards allowing the consolidation and practical offshoring of activities.However, one thing is certain; this is an important and exciting state of flux for the SSO industry, which is set to continue to grow.However, locally the operations and costs do not necessarily match this top down vision.We have seen many organisations looking to drive value from their vendor relationships, but operationally,they are inhabited due to legacy systems costs - they cannot go from a creaking boat to a spaceship overnight.Then comes the legal and regulatory angle. Data privacy regulation can be a real inhibitor for SSO if not planned well. Asian regimes have historically been permissive in this area, but this is rapidly changing, with new regulation in jurisdictions such as India, Malaysia, Singapore, the Philippines, South Korea and Taiwan, and a stepping up of compliance requirements in more established jurisdictions such as Hong Kong.As these laws are still being written, until regulators give clear guidance, there will continue to be significant uncertainty, including in key areas of relevance to SSO such as cross-border data flows.In terms of innovation and differing models, we have seen different low cost models work, typically coming from Europe, 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 25 |Shifting to Strategic Shared Services and OutsourcingThere is no question that organisations realise that they need to utilise a combination of service delivery models to drive their services maturity efforts, said Cliff Justice, U.S. leader of KPMGs Shared Services and Outsourcing Advisory group.This means that a critical success factor is having a well-defined service management framework that includes governance, a customer contact model, and service level agreements and management processes. This becomes even more critical with the growing complexity of service delivery models, as a consistent framework is required to manage the different parts of the model. A strong service management framework establishes transparency and trust in the performance of the shared services organisation. It drives the partnership between the SSO organisation, its customers and key stakeholders, defining how decisions are made and managing the service delivery model.Organisations struggle with service management because: It requires a new skill set. It is complex: Governance within the service management framework is required at all phases of the SSO set-up from assessment through to implementation and the operation of business as usual services. Its requirements may also change throughout the different phases, as different decisions are required from different stakeholders as the focus changes. It requires cultural change: It represents a cultural change from managing internal services. SSO services are regularly measured and assessed using agreed KPIs. Customer service levels are a key component of these KPIs.This is a sample illustration of a typical service management model:These challenges should not really prevent SSO from being implemented. However, an inability to address them can result in severe consequences, e.g., financial penalties, reputational damage and the ultimate failure of the SSO.Service defnitionPerformance reportingService reviewService LevelAgreementPerformancemeasurement1. Governance: Structure/Meetings/Issue Escalation2. Service Level Agreement3. SSC/Outsourcing Service Management Sample Processes Performance management Communication Continuous improvement Change request processService managementSource: KPMGTherefore, it is vital that organisations address service management at the outset of their shared services and/or outsourcing journey and plan how they will implement it. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Shifting to Strategic Shared Services and Outsourcing| 26 The key drivers of change and how these affect organisations need to be understood so that organisations can make the right innovative or evolutionary changes.The key parameters leading to changes in the traditional outsourcing model are the complexity of the provider relationship and the standardisation of processes. Assessing new SSO concepts in relation to these parameters can support organisations in assessing if their objectives will be met by implementing the concept. Innovative concepts like Cloudsourcing, Crowdsourcing and Unsourcing are being tested and utilised. While they can result in significant benefits, they also bear risks and challenges. Organisations need to carefully consider how best to implement them. As an outsourcer, innovation can and will allow for differentiation from the competition as well as create demand. However, organisations need to focus on looking at combinations of their current operations to create value, rather than simply automating a process and implementing technology solutions.Embracing best practice such as Six Sigma will continue to be a prerequisite within the industry, and the SSO market in general needs to continually focus on operational efficiency to drive costs down.Besides innovation, the key trend is the move towards global business services and the extended global enterprise. Organisations need to continually assess how to optimise their SSO models.Implementing the EGE model may be complex, yet it provides significant benefits. As organisations and service providers push service scope boundaries, innovative solutions can arise, resulting in new models of partnership and engagement with all stakeholders. Where new services or capabilities do not currently exist in the organisation, a cheaper and quicker alternative may be to outsource them. Organisations should consider the key challenges and mitigating actions during the feasibility phase, as these can impact on your SSO solution and affect the success of implementation.12345678910Summary: 10 things you need to consider Conclusion 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 27 |Shifting to Strategic Shared Services and OutsourcingNotes 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. 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