The concept of shared services, developed over the years, is an important decision for global companies, who have already outsourced some of their processes to India and other developing countries. Such outsourced services allowed them to avail the benefits of cheaper manpower costs coupled with increased productivity and efficiency. Over last two decades, India has become a global outsourcing hub for many multinational companies. The concept of shared services has its fundamentals in consolidation and outsourcing of certain activities and processes. Indian businesses have recently started adopting this concept for achieving growth through niche specialisation, cost effectiveness and delivery excellence.
Outsourcing is the key
In a complex corporate world, the corporates are supported by non-core, back-stage activities such as finance, human resource, procurements, legal compliances and IT functions, which may not directly add value to external clients but are of great importance for internal operational efficiency. Shared services mean a model which combines and consolidates specific functions and provide arbitrage on costs, skills, talent and expertise. This distinct entity adopts scientifically justified sharing criteria to support the costs associated to its own operations. Developing a model for shared services though depends upon critical needs of each entity, it generally includes IT maintenance and development, HR functions, accounting, general administration, CSR activities, research and development, logistics, marketing, payroll and debt recovery.
The shared services model can be set up either by outsourcing to third party or by developing in-house regional/global centre of excellence. Such centre can be in the form of wholly owned and controlled entity, joint venture, BOT model or independently controlled entity. Key drivers for setting up third party or in-house shared service centres could be level of professionalism required, nature of activities, size of activities, expected turnaround time and regional and geographical constraints.
Effective way to optimise cost
The concept of shared services stands out as an optimum option to leverage size and to obtain cost optimisation. However, beyond the cost and streamlining of repetitive functions, it also offers improved service quality, faster turnaround and greater consistency. While all of this sounds great on the surface, shared services implementation has a mixed track record of success. Efficient transformation and transition approach are major prerequisites for successful implementation of a shared services centre. A few factors to be considered while setting up a shared services centre are measurement of existing service levels and operating costs before implementing the model, documenting process and work streams, cost and revenue modelling, factoring employee morale and minutely supervising transition period. Failure to adequately prepare employees or customers for the change from traditional support services to the shared service structure can result in low employee morale and a feeling of loss of power from quarters.
The key is to deal with these issues up front, ensuring that the amount of ambiguity, misunderstanding, and miscommunication is reduced or eliminated. The cost, transition and revenue model for such entity need to be designed in within the framework of applicable acts, rules and regulations.
There are many conglomerates in India who have developed and successfully implemented shared services model. The very existence of e-commerce companies is based on shared services model where they outsource warehousing, invoicing, retailing, marketing and logistics. The ‘Make in India’ and ‘Made in India’ visions have also been one of the factors for progress of shared services concept in India.
One of the major factors for successful implementation of shared service is smooth integration of resources, migration and set-up of a new system and safeguard against data leakages. Another factor worth noting is the mode of transfer of assets, employees and initial funding requirements coupled with appropriate transfer pricing policy to recover initial as well as recurring expenses under a contractual relationship between provider and recipient of services.
Addressing cash outflow
Moreover, the shared service model entails additional cash outflow in the form of stamp duty on transfer of assets/ premises, withholding taxes, applicability of goods and service tax on services rendered. However, such additional cash outflow could be addressed by adopting no mark-up model, which again needs careful consideration. GST may still be applicable irrespective of whether mark up or no-mark up model is adopted. Such inference can be drawn on the basis of the recent judgement by the Advance Authority of Ruling,
in case of Columbia Asia Hospitals Private Limited, wherein it was held that activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance, for the units located in other states shall be treated as supply and hence chargeable to GST. GST also gives rise to an issue of entitlement of input tax credit especially when some of the entities render ‘exempt services’.
It is worthwhile to note that though these impediments seem to reduce the attractiveness of concept of shared services model, it can still be a preferred approach to achieve incremental usage of available resources, create value, optimise costs and improvise quality of support work.
Saumil Shah is Partner and Jagruti Sheth is Principal at Dhruva Advisors LLP