Shared financial services have long been hailed as a revolutionary approach to business operations, promising streamlined processes, significant cost savings, and enhanced efficiency. By centralizing back-office functions like accounts payable, accounts receivable, and payroll, companies aim to achieve economies of scale and focus their resources on core business activities. However, the reality is often more complex. While the benefits are well-documented, a deeper look reveals a number of significant drawbacks and challenges. This article delves into the often-overlooked cons of shared financial services, providing a detailed and comprehensive overview of the risks, pitfalls, and potential failures that organizations must navigate to avoid costly mistakes.
The High Cost of Implementation and Transition
Contrary to the popular narrative of immediate cost savings, the initial journey to a shared services model can be a financially taxing and complex undertaking. Organizations often face significant, and sometimes unexpected, costs that can derail a project before it even gets off the ground.
Escalating Startup Costs and Cost Overruns
Many organizations underestimate the financial investment required to launch a new shared services center. The implementation process is fraught with potential for delays and significant cost overruns. This can be attributed to what experts call ‘path dependence,’ where prior investments in outdated systems and processes make it difficult and expensive to pivot. For example, a company might need to completely replace an existing IT infrastructure to create a new, common platform, incurring costs far beyond initial projections. This can involve re-training staff and abandoning systems that have not yet reached the end of their economic life. The complexity of interconnections between different processes, such as payroll and pensions, also makes it difficult to isolate and replace one part of a system without requiring costly changes elsewhere. In some extreme cases, the unforeseen costs can be so great that the project is abandoned entirely.
Increased Transaction Costs and Undocumented Processes
Beyond the initial setup, a shared services model can introduce higher transaction costs. These are the expenses incurred in arranging and monitoring a process, such as documenting current operations, setting performance targets, and monitoring service level agreements (SLAs). For many organizations, existing processes are not well-documented or understood, making the initial documentation phase costly and time-consuming. This is especially true for companies that have grown through a series of acquisitions, each with its own unique and often unwritten procedures. The effort required to codify and standardize these haphazard systems is frequently underestimated, leading to delays and budget shortfalls. Furthermore, the ongoing costs of monitoring and adjusting SLAs can also erode the anticipated savings.
Organizational and Cultural Resistance
A successful shared services transition is as much about people as it is about processes and technology. The human element, including resistance to change and a lack of clear communication, can be a major source of friction and project failure.
Resistance to Change and a Loss of Control
One of the most significant challenges of shared financial services is dealing with the strong resistance from employees and business units. People fear job cuts, changes to their roles, and a loss of autonomy. Financial controllers and CFOs in individual business units may be unwilling to relinquish control over their back-office functions. This resistance can be either active or passive, leading to a lack of engagement and, in some cases, outright sabotage. A centralized authority can mandate a shared services model, but this top-down approach can often exacerbate passive resistance and create a tense working environment.
Communication Gaps and Lack of Agility
As a shared services model grows, communication can become a significant challenge. Requests from internal departments can overwhelm communication channels, leading to delays, misunderstandings, and dissatisfied “internal clients.” Without a centralized communication platform and defined points of contact, important information can fall through the cracks. This can lead to a perception that the shared services center is a bureaucratic and unresponsive entity. Furthermore, the standardized, one-size-fits-all approach of a shared services model can inhibit operational agility. While it offers consistency, it can also make it difficult to adapt to the unique needs of different business units or to quickly respond to market changes.
Operational and Service Delivery Issues
Even with a successful implementation, a shared services center can face ongoing operational challenges that undermine its value proposition. These issues can affect everything from service quality to long-term sustainability.
Service Level Agreement (SLA) Entanglements
While SLAs are meant to ensure service quality, they can also become a source of contention and bureaucracy. Organizations often spend a great deal of time creating overly granular SLAs that are not actually necessary, wasting precious resources. This focus on process over outcome can cause the shared services center to lose sight of its core mission: providing excellent support to the business units. When an SSC becomes too internally focused on cost reductions, it risks losing its responsiveness and becoming a bottleneck rather than an enabler.
Loss of Customer Focus and Quality
In the drive for cost reduction and efficiency, shared services centers can lose sight of customer satisfaction, both internal and external. A Gartner study found that a focus on cost reduction often leads to a decline in the ability of shared services teams to meet customer expectations. This can be due to a lack of incentive for the teams to prioritize customer satisfaction, or a lack of integrated systems that provide real-time visibility across different departments. This loss of focus can lead to decreased customer retention and, ultimately, a negative impact on the business’s bottom line.
Lack of System Integration and Non-Standard Processes
The success of a shared services model depends on a high degree of process standardization and system integration. However, many organizations fail to achieve this. If different business units use disparate systems, a shared services center may need to undertake costly IT upgrades or workarounds to get everyone on the same platform. This can also lead to issues with compliance, especially for multinational companies where tax laws and regulations differ across regions. The one-size-fits-all approach can create problems when it clashes with specific local or regional requirements, leading to potential compliance issues.
Geographic and Regulatory Disadvantages
For global organizations, the geographic centralization of shared financial services can present unique and significant disadvantages of shared service centers.
Compliance Headaches and Regulatory Hurdles
Operating a shared services center for a global company can be a compliance nightmare. Different countries have varying legal, regulatory, and tax structures. A centralized model must be able to navigate a complex web of international laws and accounting standards. This can make it difficult to ensure that all financial processes are compliant with local regulations, leading to potential fines or legal issues. Furthermore, the challenges of working across different time zones, languages, and cultures can add layers of complexity and cost.
Single Point of Failure and Resource Scarcity
A centralized model, while efficient, can also be vulnerable to a single point of failure. If a disaster or major disruption strikes the location of the shared services center, the entire organization’s back-office operations could be paralyzed. This risk is often overlooked in the pursuit of efficiency and cost savings. Additionally, a shared services model can sometimes lead to an uneven distribution of workload, causing burnout for some employees while others are underutilized. This can also make it difficult to attract and retain specialized talent, as the centralized model may not provide the same opportunities for professional growth as a decentralized one.
How Emagia Helps Overcome These Challenges
While the cons of a shared services model can be significant, the right technology partner can help organizations mitigate these risks and turn challenges into opportunities. A leading provider in this space is Emagia, whose solutions are specifically designed to address the pitfalls of traditional shared services models.
Streamlining with AI-Powered Automation
Emagia’s AI-powered automation solutions directly address the inefficiency and lack of agility that plague many shared services centers. By automating repetitive and manual tasks in areas like accounts receivable, cash application, and credit risk management, Emagia helps free up finance professionals to focus on higher-value activities. This not only improves productivity but also enhances customer satisfaction by ensuring faster and more accurate service delivery. The technology helps break down silos and provides a single, integrated platform for a holistic view of financial operations, which is crucial for a successful shared services model.
Enhancing Compliance and Global Visibility
Emagia’s solutions are built to handle the complexities of global operations. The platform provides real-time visibility and a unified view across different business units and geographies, making it easier to manage compliance with various regulatory and tax requirements. By standardizing processes and data on a single platform, Emagia helps eliminate the headaches associated with non-standard processes and fragmented systems, a major drawback of many traditional shared services implementations. This centralized data hub also enhances security, a critical factor for any financial operation.
Frequently Asked Questions About Shared Financial Services
What is the main challenge of a shared services model?
The main challenge is often the human element, specifically resistance to change from employees and business units who fear losing autonomy and control. This can lead to significant communication gaps and a lack of engagement, which can derail the entire project.
How do you overcome the disadvantages of shared services?
Overcoming these disadvantages requires a combination of strategic planning, strong leadership, and the right technology. Key strategies include meticulous process documentation, clear and consistent communication, a focus on service quality in addition to cost reduction, and the implementation of modern, integrated technology solutions that can automate manual tasks and provide real-time data visibility.
What is the key difference between a shared service center and a decentralized model?
A shared service center centralizes specific, often high-volume, back-office functions from different business units into a single entity. In a decentralized model, these functions are handled independently within each business unit. While decentralization offers more autonomy and a greater focus on local needs, it can lead to duplication of effort, higher costs, and a lack of standardization across the organization.
What are the potential risks of implementing a shared services model?
Potential risks include significant cost overruns and delays during the implementation phase, a lack of operational agility, a decline in customer satisfaction, and exposure to a single point of failure. These risks can be compounded by poor communication and resistance to change within the organization.
How can technology help mitigate the cons of a shared services model?
Technology, particularly AI and automation, can help mitigate these cons by automating repetitive tasks, improving data accuracy, and providing a single, integrated platform for financial operations. This can reduce transaction costs, enhance compliance, improve service quality, and free up employees to focus on more strategic work, ultimately making the shared services model more effective and resilient.
