Shared Services: A Leg Up on Acquisition Payoffs

With high-priced mergers and acquisitions activity continuing to run strong, there is no shortage of opinion on what it takes to successfully meld two organizations and their unique cultures. A recent addition to integration methodology is the concept of plug and play, or the speed and ease with which one organization can absorb another into its normal operating practices. This typically involves the technology to incorporate information and combine it with existing management systems and reporting procedures. Perhaps no single factor is as important in effectively implementing plug and play as the ability of the acquirer to apply focused expertise to the systems and technology that control corporate information flows and needs. In my opinion, the fastest and most productive method to effect this transition is “shared services.” The concept of having a single centralized unit to distribute common services among many components within a corporation was largely a response to cost pressures of the 1980s and early 1990s, which required doing more work with less staff, or uncovering new strategies to get work done more efficiently in shorter cycle times and with improved quality. There had been many prior efforts to improve staff productivity but they generally had flaws related to how work was performed. Typically, staff work was organized around professional disciplines, which placed a higher value on integrating areas of specialized expertise than on delivery, performance, or contribution. Much of the volume-intensive transaction work resembled feudal-style cottage industries with a few people using antiquated methods to combat increased paper flow and information processing demands. Pleasing the boss was paramount. Customer awareness and satisfaction were alien concepts to internal service providers. Recognizing that these issues were rooted in the delivery of staff services, a few major corporations concluded major organizational change was needed. Since virtually all of their staffs addressed the same fundamental needs of all their businesses, why perform the work individually within each unit? This recognition ultimately led several corporations, including Amoco Corp., Tenneco Corp., AlliedSignal Inc., Rhone-Poulenc SA, and Monsanto Co., to form leveraged and focused service delivery units under the rubric of shared services. These landmark changes were based on the belief that common management practices could be concentrated in stand-alone, business-oriented units focused on delivering needed services that met or exceeded requirements of internal customers – i.e., employees – at the lowest possible cost. The aim was to produce accountability within organizations that would be more effective than the traditional functionally based, discipline-oriented structures with multiple points of responsibility and varied practices. Unique service provider-recipient relationships were established. The same “best practices” previously used to gain a competitive advantage with external customers were applied internally to create partnerships. Consequently, internal customers could specify what services and how much of them were needed, and expect shared services providers to meet their requirements. Similarly, service providers would have their performances evaluated objectively through measurable criteria. The plug-and-play connection Companies employing the shared services approach now enjoy an enhanced ability to do plug and play in m&a, joint ventures, and other kinds of alliances. With shared services, an acquirer can quickly produce critical information about the target company’s systems, finances, operations, and other facets and shorten the transition period when bringing the new entity aboard. This information is not as readily available in functionally organized companies where a support component like finance may be dispersed across multiple locations and lack focus on a particular set of services. Shared services, as a single point of enterprise-wide information, can dispatch teams of finance people with experience in integrating new entities, thereby leveraging their knowledge and experience. Fewer resources are needed to effect changeovers in technology and systems, or whatever else is required to bring the merged entity into the acquirer’s information management practices with speed and accuracy. Moreover, with shared services, team members can be part of the m&a due diligence effort, identifying how best to effect the links necessary for a seamless flow of data, even before the merger is approved. Companies utilizing shared services in this manner believe that the speed of integration is critical to both premium recapture and conversion to a new corporate identity. The importance of establishing the new, merged identity is often overlooked but it is something that should be effected swiftly to minimize disruption and turmoil. A senior executive at a shared services company active in m&a told me that the first position his firm replaces at a target is the CFO because it wants to minimize resistance to financial integration and management reporting. The new financial chief focuses on how best to effect the integration, rather than debating the whys and why nots. In this way, the acquirer ensures a timely melding of the acquisition into its operations and eliminates attendant obstacles. Think of the acquiring company as an electrical outlet, and the acquired entity as a plug. Shared services facilitates the connection with minimal delays and a reduction in dysfunctional behavior. Typically, there is much employee discontent and anxiety during a transition, so the faster the acquirer can put people-related issues to bed, the better for all concerned. Another significant benefit of shared services is its ability to absorb services and activities being performed in the acquired company with little or no increase in headcount. For example, if the target has a 20-member accounts payable department, shared services may require only one or two more people to handle the additional workload. This can be important to financial analysts who value premium recovery as an essential element of earnings growth. Alternatively, realized cost savings can be quickly funneled into technology investment or parlayed into other m&a opportunities. Companies that don’t use shared services also can capture redundancy savings. But the savings may come harder because comparable functions in the two companies may be organized differently. For example, accounts payable in one company may be organized around accounts, while the other is centered on geography. If the two departments operate on fundamentally different premises, merely combining them changes nothing. One must convert to the other’s approach, or some sort of hybrid must be created. In either case, there is a minimal savings, most of it realized at the middle management level, but not among the people actually doing the work. In a company with significant shared services breadth, more plug-and-play areas surface as candidates for cost cutting. In procurement, for example, vendor contracts negotiated by shared services can be revisited for additional leverage in light of increased requirements. If the acquirer and target are in same industry, identical vendors may be supplying both companies, and volume discounts can be obtained. To further explore the role of shared services in various m&a scenarios, I spoke with senior shared services executives at companies that use the approach. Their perspectives show how shared services organizations facilitated a variety of advantages and benefits from their transactions. DuPont’s global reach DuPont Co. gains value from using its internal shared services unit – Global Services Business (GSB) – to help implement integration strategies. James Kearns, the GSB account leader, believes that companies with demand-driven shared services organizations are positioned to quickly capture savings in staff services, which account for a significant portion of overall operating expenses, after an acquisition. Says Kearns, “Areas such as engineering, sourcing, facilities management, IT, and human resources represent the underpinnings upon which a business runs. When you integrate a new company into yours, the pressure is on to quickly find ways to save money, improve productivity, and add value. Having an integrated shared services business unit in place helps our businesses get a clear picture of the staff services being performed and what they cost. This helps them to more quickly and efficiently eliminate redundancies, and save money.” Kearns said that when DuPont’s Performance Coatings operations merged with Germany-based Herberts Coatings, a multibillion-dollar global business, the combined unit found considerable global overlapping of service providers. Because GSB provides a large portion of DuPont’s services, it was able to promptly generate critical information on services and costs on a regional basis. Conversely, Herberts’ complex organizational structure made it more difficult and time consuming to collect services cost information from various entities and locations and to pull the data together for a complete picture. One of the earliest, and most dramatic, savings effected in the Herberts merger developed in Europe, according to Georges Darrer, European director of sourcing and logistics services for DuPont. There, leveraged contracts established by GSB Europe immediately helped to reduce 1999-2000 energy costs by more than $2.5 million at Herberts sites in Germany and Switzerland. An additional $1 million in savings is expected during the next two years. In an integration project in Asia, GSB linked the merged businesses with low-cost, high-quality information technology resources in India, resulting in a fivefold reduction in costs that saved more than $120,000. Other projects are being planned to use the same resource to effect additional savings. Kearns concludes, “When you buy or merge with a multibillion-dollar company, you are going to find multiple people doing the same tasks. To capture maximum shareholder value, you must determine whether you need all those people to get the tasks done at the lowest cost; and the faster you make that determination, the better. As an example, instead of having to hunt down the data on what engineering resources you have in Germany, you can get the info from shared services because they are connected and already have it. With shared services in place, you can secure objective, reliable data faster.” Heavy lifting at Alcoa Alcoa Inc. acquired three large corporations – Alumax Inc., Reynolds Metals Co., and Cordant Technologies Inc. – over a 12-month period. The three targets, none of which had significant existing shared services organizations, had annual revenues of $10 billion, effectively doubling Alcoa’s revenue base, employee count, and operating locations. William O’Rourke, vice president of Alcoa Business Support Services (ABSS), cites the quick recovery of premiums paid for the acquisitions as one of the principal benefits of the company’s shared services business unit. When it acquired Alumax, Alcoa quickly reduced expenditures by $13 million by having ABSS take over various Alumax business processes. As is usually the case with shared services, it was not one large cut but an amalgamation of many smaller reductions that produced the overall savings. These primarily resulted from economies of scale, such as expense account processing. ABSS had been processing 7,000 envelopes per month with 12 employees. The addition of Alumax raised the total to 11,000 envelopes per month, but only one additional employee was needed to handle the increased volume. Alcoa achieved similar results in other processes. O’Rourke says that another acquisition-related advantage for ABSS is its rapid-integration web site that facilitates 30-, 60-, and 90-day plans for integrating acquisitions. The integration web site includes a glossary of Alcoa jargon, a who’s who directory, and accountability for the tasks in the various plans. O’Rourke explains that acquired companies first are brought into the expense accounting process, the travel program, and low-value procurement card. They are then brought into the general ledger and common chart of accounts, which is necessary for closing the books on the acquisition. Following that, other processes are rapidly blended in, such as freight audit and approval, property accounting, accounts payable and receivable, subsidiary ledgers, cash applications, disbursements, and the like. In other areas, material safety and data sheets are made accessible, the new locations are installed on the corporate real-time safety data system, and all leveraged contract terms are made available. “Shared services also contributes to procurement savings in an acquisition,” adds O’Rourke. “According to McKinsey (& Co.), when you buy a company in the same industry, you should secure a 10% reduction in the buying price. In the case of Alumax, the total spent per year was about $1.4 billion. So, ABSS set a target to get $140 million out of the purchased cost of goods and services, which we achieved. This was part of an overall program to take $390 million out of purchasing by year-end 2000, a target which we met.” Honeywell goes upstream Prior to its 1999 merger with AlliedSignal Inc., Honeywell Inc.’s shared services experience was limited to transactional processes within selected functions, but it lacked a stand-alone shared services unit. When the two giants merged, AlliedSignal’s Business Services unit absorbed Honeywell’s shared services activities and assumed the Honeywell name. Dan Henderson, vice president and general manager of Honeywell Global Business Services (HGBS) explains, “As we started to discuss how to organize and operate the new $25 billion company, we settled on two key design principles. First, we would have a global strategic business unit organization in which each business unit would be run on a global basis, rather than having a European or Asian set of businesses run independently. Second, HGBS would support all of the business units.” Henderson continues, “Forty task teams were created to assess worldwide opportunities for shared services in Europe, Asia-Pacific, Latin America, Canada, and the U.S. in finance, payroll, human resources, information systems, travel, and other functions. The result was a global plan to save the company $100 million over a two-year period. Shared services became the value driver to integrate administrative, transactional systems, financial, policies, benefits, and other functions of the two merged companies so they could operate as a single organization as soon as possible. Senior management recognized shared services as a key to rapid integration and creating a true global support structure.” Focal point of SBC’s expansion Steve Welch is president of corporate and administrative services at telecommunications giant SBC Communications Inc. In 1997, SBC purchased Telesis Inc. and subsequently acquired Ameritech Inc., Southern New England Telecommunications, and a number of smaller companies. The result has been an enormous expansion in the size and scope of the company’s customer base, geographic penetration, and shared services organization. Prior to the acquisitions, Welch presided over a shared services organization that already had compiled impressive savings. The cost of delivering services had been slashed by 54% and customer satisfaction ratings had jumped from the high 70s to the mid-90s percentile while the shared services workforce was reduced by 42% over a period of years. In the early days, SBC’s shared services unit had 43,000 employees (internal customers) in seven business units serving the California and Nevada markets. Today, Welch’s shared services operation serves 205,000 employees in 24 business units in 14 states and other SBC subsidiaries in the U.S. As a result of the Ameritech merger, shared services also is expanding internationally. Services include procurement, administrative, motor vehicle fleet management, material logistics, and purchasing. Shared services has grown from 1,200 to 3,000 employees and there is a separate shared services group of 16,000 employees for information technology, which Welch believes is the third-largest IT organization in the United States. Welch sees shared services playing an important role in the future of the telecommunication industry, where the race to globalize has spawned unparalleled m&a activity. He sees the trend accelerating in Europe, with telecom companies trying to globalize their service territories to leverage their competitive advantages. The strategy has become a play on competitive infrastructure, i.e., acquiring a number of companies and removing internal costs while developing shared services groups that create strategic value for the company in its marketplace. He believes that supply chain management, which has been increasing in importance, is a critical shared services function, and notes that while it is partially being driven by m&a activity, its emergence also results from a new business model that outsources more operations and must deal with technology that involves partners. Says Welch, “The supply chain management function within any corporation dealing with technology has become far more strategic in recent years. Many companies have emerged that no longer manufacture their own product, but instead outsource that function while retaining management over its design and marketing. That requires an aggressive and unified company approach, as opposed to an operating-division approach to managing the supply chain. It also coincides with working closer with your clients, and is true of material logistics and IT. In fact, it’s hard to think of an area where it is not true because supply chain management must be accomplished with a total corporate perspective in mind, so naturally it gravitates to shared services.” Welch adds that about 60% of the recapture of m&a premiums came from supply chain integration. It has taken about two years to integrate the various supply chains to realize about a 7% reduction in overall costs. International Paper’s payoff International Paper Co. (IP) is another company on the m&a fast track. It acquired Union Camp Corp. in 1999 and Champion International Inc. in 2000 to grow sales to the $30 billion level. Jim Martin, director of financial shared services for IP, says that his group enjoys “talented, experienced employees, metrics and measures for quick system comparisons, and the support of our business groups,” which helped in the Union Camp integration. While Union Camp had started a shared services program, “a variety of issues were encountered during the conversion that made it necessary for us to step in.” “We sent some of our experienced employees over to Union Camp’s shared services on a temporary basis to ensure a smooth conversion of operations,” Martin says. “Our biggest advantage is the expertise we’ve gained as a strong shared services organization. Our employees are our greatest asset. We received some great feedback from UCC senior management for our efforts in implementing shared services. We’re using this feedback to develop best practices to help us with future mergers and acquisitions. “We wouldn’t see the same merger and acquisition benefits if we were organized by business because the combined companies would have roughly the same number of people assigned to processing accounts payable, general ledger transactions, and the like as before the merger. With shared services, we can pull those synergies together to leverage our size and the efficiency we gain through standardized procedures and best practices.” If you believe that history repeats itself, m&a activity may eventually slow, or even reverse its current course, followed by spin-offs and disposals of operations that no longer generate value or make sense to keep. Much of this already is underway. Shared services companies should continue to enjoy an advantage in the restructuring mode. They will be able to reverse the plug-and-play capability that served their integration efforts so well and convert it into an unplug-and-play capability. They will be able to move quickly and effectively to divest unwanted operations. Shared services can make unplugging divestitures simpler through a phase-out process by providing services to an operation earmarked for disposal until a final decision regarding its ultimate status is reached. That process allows the corporate owner to immediately remove the divestiture from its financials, as required by accounting rules, so it is no longer reflected in the parent’s operating results or performance. Shared services even can continue providing services to the divested entity for an extended period after the disposition. Should the divested business be acquired by another company, shared services can smooth the transition as a single point of contact for both parties. Or if the divestiture becomes a stand-alone business, a continuation of quality services can help until it is fully established. In a joint venture, shared services not only can provide ongoing services to the jointly owned entity but smooth the exit for a partner that wants to sell its interest. Shared services can provide de-plug services for the selling partner, thus minimizing disruption in the operation of the business. In addition to traditional m&a and JV activity, there likely will be more partnerships of various types involving virtual, alternate, or multiple partners, even business-to-business exchanges. Shared services companies will be better able to deal with the complexities of integrating these hybrid entities than will companies in which services are performed by multiple staff functions throughout the organization. Shared services companies will have an enhanced ability to plug into whatever kind of relationship the corporation wants to pursue, effecting faster, easier, and more accurate information flows and exchanges, or to unplug partnerships that are not working. Whether the pace of m&a activity increases or abates in coming years, companies must prepare for a wider range of organizational alternatives. These alternative structures will create new challenges for corporations, in how they manage information, provide services, integrate systems and processes, and take advantage of synergies. Companies with shared services organizations that have developed the necessary expertise, competencies, leverage, and scale will be in the best position to facilitate myriad plug-and-play, de-plugging, or other forms of interaction needed to support organizational strategies and operations.