AI In Shared Services: How Technology Can Create Value For PE-Owned Midsized Businesses

Shared services have proven to be a cost-effective operating model for support functions in large corporates. Traditionally, cost-conscious companies have followed an offshoring...
India Corporate/Commercial Law
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Shared services have proven to be a cost-effective operating model for support functions in large corporates. Traditionally, cost-conscious companies have followed an offshoring strategy to take advantage of educated, skilled, low-cost labor in countries such as India. They have either outsourced or set up their own global capability centers (GCCs), often requiring large scale operations, with several hundred full-time equivalents (FTEs), to be cost-effective.

Now, technology arbitrage is allowing small and mid-sized enterprises (SMEs) to adopt shared services as a model for generating value and superior returns. The rapid drive to automation and artificial intelligence (AI) is drastically reducing the need for onsite personnel, making GCCs in lower-cost jurisdictions feasible at lower scale. Technology is also challenging the need for multiple centers, as voice recognition and transcription tools are able to handle multiple languages without the need of human-to-computer interaction.

Private equity (PE)-owned small and medium-sized enterprises (SMEs) are well positioned to take advantage of that major disruption in the offshoring industry. These companies often face urgent needs to drive efficiency and reduce costs. Technology-enabled shared services offer an effective solution that can be implemented within typically short holding periods and exit plans.

In this article, we will briefly discuss the different shared services models and explore the solutions that work best for PE-owned SMEs.

GCCs, outsourced and hybrid models

Setting up and expanding shared services can be complex and time-consuming for management. Therefore, understanding the distinct benefits and challenges of each shared services model is critical to choose the most suitable approach based on the business' size, strategic objectives, and specific operational needs.

Below are the three most common operating models in the market:

  1. Global capability centers are set up and operated by company management.Technology and automation advances have made captive centers in low-cost jurisdictions feasible at scales of as low as a few tens of employees. Both capability and automation arbitrage drive value over and above cheaper labor. With less reliance on labor arbitrage, near shore or virtual centers are therefore becoming more popular as a location choice.
  2. Outsourced solutions provide the advantage of quick speed of set up, which can be advantageous in situations such as carve-outs. When PE firms acquire organizations in the middle market, the resulting portfolio companies typically do not have scalable corporate functions as part of the acquisition. Outsourcing can provide a ready-made solution and access to tried-and-tested technology.
  3. Hybrid models provide the most flexible option from a combination of both captive and outsourced models. There can be a challenge for setting up shared services in a PE environment because the payback period for shared servicescan be several years, especially with a captive model, and PE doesn't hold companies for extended periods. Hybrid models provide speed through outsourcing as well as greater management control.
GCC Outsource Hybrid
  • Facility and employees owned by company
  • Only services one buyer group – may serve multiple operating companies
  • Charging may be cost recovery only, cost plus of commercial pricing
  • Most successful with confidentiality concerns
  • Long-term service contract (3-7 years)
  • Typically in off-shore locations, leveraging service provider network
  • Multiple clients serviced from different locations
  • Utilize technology and provider know-how
  • Combine outsourcing of transactional services whilst developing own capabilities for higher value services
  • Offers local control and ownership with lower offshore pricing

The hybrid advantage

Hybrid options have become increasingly common in the past five years. In this model, companies may choose to outsource more transactional services, such as accounts payable and payroll, while developing their own capability centers for higher value services such as financial planning and analysis (FP&A).

This approach enhances efficiency and reduces cost for transactional services, which also benefit from improved resilience and effectiveness. In essence, a hybrid model couples the benefits of local control and ownership alongside the cost savings of offshore pricing.

Hybrid solutions can take different forms, including:

  • Partially outsourced functions: rather than outsourcing a whole function such as Finance, transactional activities and other processes which can be automated are outsourced. Outsourcing areas that are not core value-creating activities and those where the company lags in technology or cost efficiency should also be considered.
  • Build-Operate-Transfer: where a third party sets up the shared service center, including hiring and infrastructure, and runs the operations. Services are transferred back to the company's ownership after an agreed period of time.
  • Hybrid resource models: managed and therefore controlled by the company, with the support of experienced third-party resources, recruitment, and facilities.

How SMEs can benefit from hybrid shared services

Based on our experience with clients, cost savings enabled by standardized processes and automation can deliver a bottom-line impact of 30% to 50%. The approach can also generate significant improvements in customer and employee experience.

The quickest way to realize value is by outsourcing and leveraging third party's capacity and expertise in providing ready-made support functions. However, this approach often requires a certain scale and entails higher one-off set-up costs.

Therefore, for small and mid-sized businesses, hybrid solutions can work best. The approach allows companies to outsource lower-risk activities (such as cash allocation, accounts payable and general accounting) while maintaining captive centers of excellence for more customer-facing and high-value activities including invoicing, reporting and supply chain.

Critically for smaller businesses, a hybrid set up can provide value in shorter timeframes through smaller, targeted solutions for shared services and outsourcing.

In addition, hybrid models drive capability development, efficiency and best use of technology, providing greater control over activities that impact sales and customers.

Case studies: creating value through shared services

After a PE firm carved out a medical technology business with revenues of approximately $1 billion, the company's management needed to rapidly design a new Target Operating Model (TOM) for all corporate functions. This would enable the carve-out entity to operate independently from the parent company.

An outsourced shared service center in India was selected to offshore manual, transactional and high-volume activities in the Finance function and order management. Alongside this, an onshore analytics capability was established to support these functions with predictive modelling and scenario analysis.

These capabilities were set up within six months, which allowed the business to early move away from transition service agreements (TSAs) and focus on the critical area of cash management, including billing and collections.

In another case, a PE-owned gym equipment manufacturer set up their own shared service center in Eastern Europe for Finance, customer services and order management functions, along with outsourcing IT services to a third-party vendor. The captive center gave the company control over key customer-facing processes and allowed improvement in both cost and quality of service provided, thus boosting both top and bottom-line numbers, while outsourcing accessed capability and lower-cost resources.

Originally published by 12 June, 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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