Realizing labor arbitrage and economies of scale for transactional processes are the traditional benefits of Shared Service Centers (SSC). Nowadays, well established SSC become more and more important for non-transactional processes optimization and digitalization in Finance and Tax.
What are Shared Service Centers?
Companies leverage the Shared Services concept to bundle certain parts of their business functions in a central organization – the Shared Service Center (SSC). Typically, these business functions used to be decentralized across multiple business entities (e.g. Finance or HR). The organizational objective of an SSC is to deliver services to internal and external business partners at a competitive price.
There are two main drivers, why companies can become more cost-efficient by implementing an SSC. First, the SSC will improve efficiency through Economies of Scale (EoS) by bundling significant transaction volumes. Second, labor arbitrage can additionally cut costs by moving activities from high-cost countries to the SSC, which is typically located in a medium- or low-cost location. As you can imagine, the SSC location selection can be critical when running such a project. Hence, it is essential to define the right balance between cost and qualitative factors such as talent availability or economic stability.
In addition to the cost savings potential, the SSC is an organizational instrument that allows companies to implement global process models to standardize decentralized and heterogenous processes. Standardized processes will provide the required transparency to identify potential risks and improve the overall process quality.
Enhanced capabilities of Shared Service Centers to support non-transactional processes
Let us stick to the example of a Finance SSC. Traditionally an SSC covers transactional activities such as invoice processing (accounts payable) or dunning letter creation. These repetitive activities offer great potential for standardization. Nowadays, well-established SSCs have proven that they can also effectively support non-transactional processes that require expert know-how from higher qualified employees. Controlling and Reporting are relevant examples of “core” Finance processes where the SSC can provide business value through data and expertise.
Current trends demonstrate that also “non-core” Finance activities, for example some tax processes such as indirect taxes and transfer pricing documentation, possess high potential for centralization.
For example, the centralization of indirect tax functions can be a very good starting point to establish standardized processes in connection with recurring routine tasks, generate synergies and increase efficiency in that single team. In addition, in a centralized team the indirect tax function can build overall visibility on the indirect tax processes (compliance, working capital management) and has the chance to develop a tax team-owned solution to cover the increasing and various type of digital VAT/GST reporting requirements.
In terms of Transfer Pricing, given the current international transfer pricing landscape with its ever more complex compliance rules and an overall trend towards increased tax transparency, it is recommended to establish a lean, centralized transfer pricing documentation approach that tells a globally consistent story, discloses only the relevant information and does not create mismatches between countries.
Centralization as key enabler for process automation and digitalization
Most companies would agree that investing in automation and digitalization is critical to remain competitive in the market. However, automation and digitalization can be rather complex and expensive, especially when facing a decentralized and heterogenous process landscape.
From a tax point of view, data management and process automation are key to utilizing the advantages of centralization. In our view, data management and analytics solutions, process automation within the routine indirect tax and transfer pricing compliance processes, technology-enabled data correction at source, development of unified tax determination logic and digital reporting solutions should all be key pillars of a tax function centralization.
It is important to highlight the importance of SSCs in connection to process automation and digitalization. An SSC does not increase automation and digitalization by nature, but it helps to significantly reduce process complexity. SSCs standardize processes and increase staff productivity through Economies of Scale (EoS). As a result, the SSC help to simplify and harmonize processes, which is a key pre-requisite to plan and execute automation and digitalization initiatives. Hence, companies can implement automated and more digital processes, increasing their market competitiveness.