Shared Services in China: Coming of age kpmg.com/cn

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1 ADVISORY Shared Services in China: Coming of age kpmg.com/cn

2 2 Shared Services in China: Coming of age Our shared services and outsourcing team Ning Wright Partner-in-charge China Outsourcing James O Callaghan Partner Advisory Alan Fung Partner Advisory Egidio Zarrella Clients and Innovation Partner Advisory Herrman Cheung Partner Advisory James Pang Partner Advisory

3 Shared Services in China: Coming of age 3 Contents China: No longer a maybe destination 4 The lifecycle of shared services development 8 Trends in the China market 14 Sustaining growth 22 Concluding remarks 24 About KPMG 26 Contact us 27

4 4 Shared Services in China: Coming of age China: No longer a maybe destination Industry consolidation and operational integration across global organisations have hastened the trend towards the development of shared services centres (SSCs). In a range of areas, from finance and HR to marketing, procurement and R&D, shared services are enabling more consistent service delivery and faster supply chains; for large or growing businesses these are the keystones of continued competitiveness. For many organisations, taking the step towards a shared services delivery model is one of the most transformational issues currently on their agenda. And, as the case studies in this paper show, the process of developing SSCs is rarely without challenges and even a few setbacks. If done right, the creation of SSCs provides an opportunity to develop radically new operating models, streamline costs and explore the potential and talent base in exciting new locations. Shared services can be the glue creating truly global and seamless organisations. If things are not done well, SSC implementation can cause unnecessary dislocation, consume valuable management time and heighten certain operational and legal risks. The root of many problems, including overrunning costs, is a failure to stay focused on a clear business case driving the creation of the SSC. Key considerations in an SSC strategy Can I get the services I need in the right language? How can I work with the regulators and the government? How much of a concern is security, both physical and virtual? How easy is it to manage skills, performance and cost? Having an articulated China strategy is essential for an organisation harbouring global ambitions. One part of that strategy is defining what form of physical presence is needed in China and how the business can harness China s competitive and increasingly well-skilled workforce. This paper examines some of the great strides China has made in becoming a desirable location for shared services and explores the most common concerns including language, costs, security and intellectual property. The growth in service outsourcing and shared services in China is being driven by the huge investments being made by multinationals as well as domestic enterprises going global. These areas of concern appear to be issues that executives feel they can manage as evidenced by the sheer number of companies with operations in the country. In a KPMG pulse survey in 2010, 42 percent of Asian executives with a shared services strategy had established facilities in China, ahead of Singapore with 29 percent and India with 25 percent. Multinationals growth in China has largely been driven by individual business units which have adopted both organic and inorganic development strategies. Until recently, the integration of individual business units was often overlooked in favour of market growth. However, in the current climate, increased competition and sustainable growth opportunities have compelled organisations to seek scale and efficiency across business units. China s vast talent pool, sound infrastructure, and strong government support all point to a bright future for outsourcing and shared services over the coming decade. However, China must continue to compete with other destinations around Asia and

5 Shared Services in China: Coming of age 5 across the world, with many executives expressing more concern with the cost trajectory of their China operations than with issues such as talent or information security. For now, it has proven itself as a viable destination, but China s longer term success will rest on it moving beyond a purely low-cost play. Government support Since 2006, China s Ministry of Commerce has provided increased support to service outsourcing enterprises. Having exceeded the targets set under the 11th Five-Year Plan, the government s 12th Five-Year Plan has placed a continued focus on service industries. It revealed that China plans to invest about RMB 2 trillion in the Information Communication Technology (ICT) industry, specifically on the development of new technology and the ongoing upgrading of infrastructure. In specific areas the government is taking steps towards a more open investment climate. For example, in mid 2011 the State Council and the Ministry of Industry and Information Technology relaxed rules on call centres, to allow 100 percent foreign ownership under certain conditions. This provides a clear message that the government is trying out new approaches.

6 6 Shared Services in China: Coming of age The Five-Year Plan also includes plans to develop western China into a hotbed for overseas investment. Cities such as Chengdu and Chongqing have already seen a huge increase in economic development activities due to their sizeable workforces, natural resources and huge market potential. The Foreign Investment Department of the Ministry of Commerce plans to adopt measures to make China s vast western region more attractive to foreign investment. Many multinational corporations (MNCs) already have a presence in China, or are considering a market entry or market expansion strategy in China. A China Daily survey shows that more than 90 percent of the multinationals plan to increase their investment in China in the period of the 12th Five-Year Plan ( ). 1 The trends are showing that they are leaning towards setting up separate entities to house their shared services centres, primarily to seek economies of scale through cross-business unit synergies and also to capitalise on tax savings, subsidies and other government incentives. Additionally, enterprises are also using their shared services centres in China to not only serve Chinese and north Asian operations but also global operations. The scope of services being offered by these shared services centres is also moving up the value chain. Driven by a market of more than 1.3 billion potential customers and favourable government incentives, China has also become a major destination for foreigninvested R&D centres. According to China s Ministry of Commerce, by 2010 China had more than 1,200 R&D centres set up by multinationals. 2 More than 300 of those are located in and around Shanghai. 3 The percentage of R&D spending by foreign-invested enterprises also grew at an average annual rate of 21.2 percent from 2002 to China accounts for 12.9 percent of total global R&D spending in 2011 to date, an increase of almost 2 percentage points from 11.2 percent in 2009, making China the second largest global R&D investor in These numbers demonstrate the sense of urgency for multinationals to consider China as a place to establish shared service centres. Activities gathered around first-tier cities focused on technology intensive industries such as life sciences, telecommunications and software development due to the availability of skilled personnel. Investments in R&D are on the rise. Many MNC R&D centres are localising through increased hiring of local and returning talents. The shared services and outsourcing industry are seeing unprecedented growth and we believe China is no longer a maybe destination. Irrespective of its size or sector, every company with global ambitions should be taking a long-term view of the role China can play in its operating model and understand what diverse options exist. This report highlights the ways in which companies are adopting different approaches and selecting different locations that work best for their business. The tried-and-tested model of realising cost savings internally and then commercialising the services once matured will continue to be a prevalent trend. The adoption of a hybrid model will gain traction, especially as global organisations continue to use outsourcing service providers to process transactional activities while retaining business-facing and higher value activities internally in Centres of Excellence. With continued government support, China is therefore expected to be a formidable force in the global shared services and sourcing market. 1 Resident income to grow in , China Daily, 7 March Can India take on China s R&D might? Economic Times, 28 December Brain Power: China as a base for R&D, New Zealand China Trade Association website, citing Jian Heping, Shanghai Municipal Commission of Commerce, November World Trade Organisation: Trade Policy Review Report by China, 26 April Battelle and R&D Magazine: 2011 Global R&D Funding Forecast, Area Development Online, 28 February 2011

7 Shared Services in China: Coming of age 7 ANZ Paul Clements, Managing Director, ANZ Global Services and Operations (Chengdu) Punctuated by stints at JPMorgan Chase and Westpac, Paul Clements has spent the majority of his career at ANZ, moving from front-end roles in relationship and investment banking, through to more recent operational leadership roles in Asia. I have worked in many parts of the business so I have a strong network which helps me in my current role, Paul explains. It is really important to know where to turn for support especially when I am building up a new Operations Centre in China. The great thing is our centre in Chengdu is part of a regional network, and we are leveraging expertise in our other, more established locations to realise our commitment to starting great from a quality and reliability perspective. ANZ provides banking and financial products and services to retail, small business, corporate, and institutional clients across the Asia Pacific region, including Australia and New Zealand. ANZ also has offices in Frankfurt, London and New York to help clients do business across the globe. ANZ has invested in a network of dedicated operations centres in Asia and the Pacific to support the business. ANZ s largest operations centre in Bangalore, India, opened in 1989 and today employs more than 5,000 people. In the past 18 months ANZ has established a further two operations centres in Asia in Manila, the Philippines and in Chengdu, China. ANZ currently has about 700 people working in Manila, while the team in Chengdu is expected to almost double in size by the end of the year from 85 to 150 people. ANZ also has a Pacific operations centre employing 260 people located in Suva, Fiji. ANZ s network of operation centres contributes to the bank s strategic agenda by ensuring it has the right capability to support business growth in a way that is cost-effective and sustainable. The primary focus of the centres is to use common infrastructure and standard processes to deliver reliable, quality operations support that enables ANZ to quickly and effectively scale up to accommodate growth in its business. This standardised operating platform, coupled with a strong customer-centric culture that extends across the bank s operations and support teams, means ANZ can deliver a consistent customer experience regardless of location and time zone. It also helps ANZ to manage and mitigate risk, as a standardised operating platform provides improved operational control and allows the operations network to create and deliver better business continuity solutions such as load sharing and maintenance of critical functions. Finally, standardised operating platforms help ANZ drive cost efficiencies as they remove duplication by creating a set of common, transparent and wellunderstood processes that support the business and its customers. Mr. Clements explains that people working in the operations centres are predominantly ANZ staff. We believe this is important when it comes to delivering service quality and keeping our strategic focus firmly on driving consistent and reliable customer outcomes, he says. The location of our operation centres gives us access to capability we can t always find at the level and quantity we need in other markets. It also helps us build diversity in our teams capabilities across Asia Pacific, ensuring we build a strong regional workforce that forms part of our competitive advantage. In China, ANZ is the first foreign bank to establish an operations centre in Chengdu. To recruit, ANZ is working hard to pitch its brand and its vision to the local employment market. Our operations may still be small, but we are the first foreign bank that is building operational scale in Chengdu, he says. We are committed to being here for the long term, and therefore we are investing in building an employee value proposition that helps us attract and retain great people who are keen to build their international experience. He also notes that, We know that as other banks establish in Chengdu, recruiting and retaining talent will become more of a challenge. It may still be early days for ANZ s operations centre in Chengdu, but it is leveraging the capability in more established centres, such as Bangalore, to ensure it can quickly and efficiently move up the maturity curve. Chengdu has the capacity to expand to 1,000 people during the next three years to support the business as required. ANZ has invested in its operational network to create operations centres, including Manila and Bangalore, which can easily scale up to support growth in the customer facing business across the region. It is this flexibility that is creating competitive advantage for ANZ as it continues to deliver on its super regional strategy, Mr. Clements explains.

8 8 Shared Services in China: Coming of age The lifecycle of shared services development The role of shared services within any large organisation is subject to its own developmental path. Many leading financial institutions have explored fully outsourcing commoditised or non-core functions, but subsequently stepped back to a shared services model. However, it would be a mistake to see shared services as a less ambitious approach. In many respects the investment and transformation entailed in SSC development is a bigger commitment necessitating a delicate balancing act. One of the keys to success is ensuring the facility operates as a distinct entity, with its own governance and performance targets. On the one hand, employees need to feel they are a critical part of the business, but on the other hand a degree of competitive tension and accountability can help to drive performance. Whether the SSC is recently established, or a mature entity looking to expand beyond captive services into a stand-alone profit centre, every organisation needs to manage growth, assess how quickly it should progress, seek out opportunities to move up to higher value services and identify the business risks that will arise at each stage of maturity. China is already sufficiently matured as a SSC destination that it is home to companies at all stages of the lifecycle. Many organisations have SSCs with more than 10 years operations. Others may be newer to the market but have entered China rapidly and moved immediately into high-value functions such as Knowledge Process Outsourcing (KPO) and R&D. The evolutionary process Justify business case Build critical mass Develop strategic direction of the SSC Scale Entry Cost Consolidation Transparency and management information 2 Establishing 3 Maturing BPO Centre of Excellence IPO/sale 4 Diversify locations and consider next steps 1 Add more activities Enhance processes Automation Use SSC to get into the China market 4 Time

9 Shared Services in China: Coming of age 9 In the first phase of establishment, executives are making their decisions based on an immediate set of business drivers, which may include managing costs or post-merger integration. Nonetheless, the criteria by which a location is chosen often reflect a longer-term perspective; seeking the optimum proposition in terms of talent, future growth and sustainability perspectives. SSC lifecycle considerations SSCs are a commitment; it can be hard to back out. A company must have a plan for its SSC to keep it relevant and competitive. The rate at which an SSC evolves can vary enormously, depending on the business. Some never move beyond the mature phase. Many of the companies we interviewed for this paper had taken a phased approach starting by consolidating operations within their home market and focusing on building internal cohesion and trust in the new operating model. Quick and visible wins can be important to build credibility. Other companies, especially in the financial sector, have looked for locations which can complement their operating model, for example developing a follow-the-sun processing model to support business across time zones while diversifying risk. At an early stage, the organisation can be reliant on external service providers to assist in setting up operations. It is easy to overlook longer-term considerations such as whether the partner can help achieve industry best practices while allowing control and managing risks. The organisation must quickly determine the practical implications of operating in a certain location with respect to its data security environment, privacy concerns, the intellectual property regime and business resilience considerations. These are considerations at the outset, but only become more pressing during subsequent growth. Once established, executives find themselves increasingly concerned with talent management and maintaining cost advantage. The larger an SSC is, the more challenging it can be to retain talent, and this is particularly evident in many Chinese locations, where other newer entrants have aggressive plans of their own. Being a

10 10 Shared Services in China: Coming of age first mover into a new location can have rewards for example preferential leases and tax incentives which are not made available to later entrants. However, equally there can be many risks for early movers in that they become a feeding ground for other companies seeking out experienced staff. Organisations need to establish procedures by which they regularly monitor for changes to tax and regulatory regimes. The implications of labour law can become more evident as the workforce grows. Once organisations have invested in an SSC it can be hard to shift direction. Initial success can create momentum to shift more functions to the captive, to achieve further economies of scale. As an organisation enters a more mature phase, executives face ongoing pressure to optimise and standardise their operations and pursue long-term targets to serve not only local but also regional (Asian) and global operations. As intellectual capital accumulates, organisations should consider what the trends are in terms of cross-border activity (both inbound and outbound) from a tax and transfer pricing perspective. Fraud and intellectual property (IP) theft also become critical concerns which need to be reviewed regularly through internal controls. The organisation should also define whether they harbour ambitions to convert the SSC from a cost centre to a profit centre and whether there are other alternative future strategies to consider, such as a sell-off.

11 Shared Services in China: Coming of age 11 The maturity of an SSC is intimately linked to its rise up the value chain and to the development of the corporate as a whole. Irrespective of the initial scope and scale of investment, very few SSCs do not follow an evolutionary path of some sort. The speed of that evolution may differ, driven by the wider corporate strategy and by the needs of the business. What is a common theme, however, is how the risk profile of the business changes over time and that each stage of maturity can be characterised by its own best practice behaviours. Transformational challenges Entry phase Regulatory compliance Understanding business operations and processes Communicating change Tax and legal structures Establishing phase Internal selling, sharing success stories Enhancing performance Risk of failure Mature phase Maintaining strategic direction from Group or agreeing to a clear direction locally Developing value-added services Retaining talent

12 12 Shared Services in China: Coming of age Lenovo Tiemei Zhu, Head of Expense Management Since Lenovo integrated IBM s personal computer business in 2005, it has taken big strides towards achieving a common set of financial processes and performance metrics, and more fundamentally to a common operating language. The company scaled down its accounting functions in different countries and moved towards a shared services model. This occurred step by step, starting by integrating operations in Asian markets such as Malaysia and Singapore, before tackling more distant markets in Europe, the US and South America. Tiemei Zhu has witnessed first hand how the accounting processes have been consolidated in a Beijing shared services centre. In the initial planning that took place from 2007 and 2008 onwards, Ms. Zhu saw the key challenge as communication, engaging local teams and getting buy-in from key business units. As functions moved, the challenge was to build out the team and maintain trust. Today Ms. Zhu s team, which focuses on expense management, is in a position to support the business and drive key decision making with more analysis and insight. We have now reached a point where we can provide central visibility over key costs to the business. We can provide information that has a critical bearing on decisions. The step-by-step relocation of services to Ms. Zhu s team in Beijing required her to build up capacity steadily over several months. She admits that finding the right experienced people can be tough. Now, she recognises that the challenge has moved to one of recognising and developing talent. You need to strike a balance, she says, nurturing the high performing talent but also continuing to bring in more junior people to create a stable, energetic team. As an international business, Lenovo must continue to seek out people with English language skills and this is an area where Ms. Zhu is seeing improvements. She believes one of the biggest assets of the business is its performance management system. This system is reviewed every quarter and every function must develop a quarterly business plan. This all contributes to a mature, dynamic management system which encourages new thinking and innovation. Nevertheless, the process of relocating support functions into SSCs has brought home to us the importance of continuing to liaise closely with your HR team. Reflecting on the experience, Ms. Zhu observes that at the outset she saw very few peers with whom Lenovo could benchmark its approach. In hindsight, Lenovo s approach has demonstrated many of the features common to multinationals. Its approach has been characterised by a logical and phased approach to growing the SSC, from consolidation in the home market through to global consistency.

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14 14 Shared Services in China: Coming of age Trends in the China market This chapter highlights various ongoing trends as well as potential future trends for the China SSC market. SSCs in China continue to evolve and in many cases cope with rapid growth. With a strong focus to develop the services sector in China, the government incentives and subsidies available further enhance the proposition of China as an appropriate location to establish an SSC. Different cities in China are emerging as preferred destinations for specific industry verticals. For instance, Shanghai has a large number of financial services SSCs, Suzhou supports many manufacturing industries, Dalian is focused more on serving North Asian countries and Shenzhen is more suitable for Southeast Asian countries. China s role for MNCs is changing. In the past, many enterprises used their offshore SSC in China primarily to serve Chinese operations and in some cases North Asian and South Asian countries. In contrast, SSCs in countries such as Malaysia, the Philippines or India were used to serve European and other English-speaking countries. As the scale of ambition for SSCs increases, and many locations face challenges including sustainability of growth, suitability of talent and changing cost dynamics, multinationals are reappraising their working models. Many companies are increasing their reliance on China-based centres to serve global operations. Many companies have increased the scope of services being delivered from SSCs. There is a clear shift from piecemeal and single function SSCs towards multi-function SSCs and processes with an end-to-end scope. Photo courtesy of Tianfu Software Park, Chengdu

15 What makes China different? There is strong growth in talent for BPO and KPO and less focus on ITO, relative to some rival locations in Asia. Rising costs are a reality in China, wherever you locate. China will need to outperform other markets to stay competitive; this may put the onus on the government to provide further support. SOEs are a significant additional driver of demand. Shared Services in China: Coming of age 15 The size and scale of the SSC market is difficult to calculate. There are opportunities to test the market in China on a small scale, using outsourcing organisations for market intelligence. The vendor market is helping to develop a talent pool which can benefit SSCs in future. If we consider the size of outsourcing vendors in China against leading global players, we can see the market clearly has huge potential. Based on analysis of company websites and annual reports, few vendors in China have yet attain headcount of more than 20,000 people, whereas the largest global vendors such as Wipro and Infosys employ in excess of 100,000 people. Nonetheless, Chinese vendors are expanding on a solid platform with many focused towards higher-value Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) services. Another key trend is the movement to second- and third-tier cities. There are many factors driving this including rising wage levels, high employee turnover and a war for talent which is compelling companies to consider new and increasingly accessible locations with sizeable workforces. Where traditionally concerns hovered around availability of an experienced workforce, this increasingly appears not to be an impediment. One operations executive with a large global investment bank said he has been impressed by the development of facilities in China, during a visit to the northeastern city of Dalian. Nobody can afford to ignore China, he explained. China is a growth market, and a shared services strategy in China aligns nicely with this. I still have some concern over spoken language capabilities, but feel that reading and writing skills are strong enough for non-voice based interaction and support.

16 16 Shared Services in China: Coming of age An executive with another Western bank based in Hong Kong felt China had become a more favourable location, but admitted that conveying this to Group headquarters was a challenge. With costs rising in other Asian locations and a need to manage overreliance on India-based SSCs, he saw potential for China to play a greater role. These sentiments would seem to explain why some global service providers are transitioning some of their operations in India to be delivered in China, although at present it tends to be Asia-focused operations. New business models are focusing on transaction pricing and gain-sharing contracts. State-owned enterprises Across various sectors, but with technology and financial services at the forefront, it is clear that China s state-owned enterprises (SOEs) have started to become global enterprises where they sense the need to develop new management models, and new approaches to operational risks. These can help them compete on a sound footing with global leaders in their industries. Considering the rate of growth among SOEs, it is essential that they continue to drive efficiencies, eliminate any redundant operations and harness the advantages bestowed by their long track record and sound financial position at home. The drivers for SOEs to set up the SSC are rather different from those of their multinational counterparts. Cost efficiency through operational excellence may be on the agenda, but shared services are not seen as a cost play. China is naturally the first choice destination for their SSC as a large part of their operations remains domestic and will need local services support. SOEs are aware of the talent pool created by the growing sourcing market. They are also striving to be more innovative in their approaches to new market entry and customer relationship management. There are three main drivers for SOEs developing SSCs. First, it is a means to learn global best practices and become a more efficient organisation. Second, it enables them to gain visibility and better manage their own people (as opposed to a focus on headcount reduction). A third and related point is the opportunity to improve and standardise processes for better management control. The development of SSCs can be seen in the context of their pursuit of recognition on the global stage.

17 Shared Services in China: Coming of age 17 GlaxoSmithKline Riccardo Calliano, China CFO and Christine Jin, Finance Shared Services Director, China / Hong Kong China is forecast to be the world s third largest pharmaceuticals market in 2011, with a value above USD 50 billion. 6 With stakes this high, global pharmaceutical companies are strongly focused on China for future growth. GlaxoSmithKline s (GSK) sales are growing by more than 25 percent yearly in China. It has various legal entities and business units in China and Hong Kong, engaged in the production, sales and research and development of prescription medicines, over-the-counter medicines, vaccines, and healthy fast consuming products. To effectively partner the business units to support the high growth, GSK s finance department embarked on a transformation plan to re-engineer itself to become a true strategic partner of the corporation. There were three separate finance teams located in Shanghai, Tianjin and Hong Kong, as well as small sub-teams in Beijing and Guangzhou. On top of this, the business units also carried a small number of finance headcount to support some of their own specific internal finance transactions. In order to align to the global finance vision and operating model, and better support the GSK China growth objective, it was decided to consolidate the finance back office teams and create a pan-china Finance Shared Service Centre (FSSC). Riccardo Calliano, GSK s China CFO, took over after his predecessor had initiated a structured and wellplanned approach to building the SSC. Starting with a clear business case and strategically aligning finance to the corporate direction, the company worked through location assessment, processes, organisation, human resources, alignment to technology, transition plan, and execution steps. Mr. Calliano recalls that it took around two years from the business case development to the implementation and stabilisation of the FSSC. Despite the various changes as a result of setting up the FSSC, we were able to retain our existing talent pool, and this ultimately contributed to the success of the FSSC implementation, he says. The FSSC is now handling all finance transactional activities for the entities and business units across China and Hong Kong. He explains, By establishing the pan-china FSSC, GSK China has achieved more than 20 percent finance cost reduction and even greater cost avoidance in the support of organic growth as well as new businesses through economies of scale. Moreover, the FSSC structure also frees up business partners and facilitates the resources allocation to the primary value adding activities of the organisation. The standardisation of processes has also helped to position us well for the SAP implementation in the near future. In 2011, GSK created Core Business Services (CBS), a new global shared services organisation, which CEO Andrew Witty has pledged Will allow us to further simplify the processes and procedures. The CBS will consolidate the service delivery functions of IT, Employee Services, Procurement, Worldwide Real Estate and Finance as well as create new cross-functional capabilities that will drive service performance and improvement. Mr. Calliano adds, The China FSSC structure is fully aligned to the global strategy, and is enabling us to further standardise our processes. He says that To ensure consistent and high-quality services are delivered to each internal customer, formal Service Level Agreements are signed with all the internal customers, and the performance of the FSSC is monitored under the FSSC Customer Review Board with a systematic mechanism. The FSSC appears to have got off to a good start with customers showing a high level of satisfaction. The CBS is still being deployed to China and preparations are well underway to meet the greater challenge. According to Christine Jin, Finance Director and Head of the China FSSC, Continuous improvements are always necessary and must be planned and managed to ensure the benefits of the FSSC model can be fully realised. I am glad to say after overcoming some teething problems and aligning customer expectations with our services, the FSSC is maturing and functioning effectively. 6 IMS Global Pharmaceutical Market Growth Forecast 2010

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19 Shared Services in China: Coming of age 19 China s Five-Year Plan The success of China s 11th Five-Year Plan, which designated 21 cities as outsourcing centres, has provided a solid foundation for the development of services more broadly in the next five years. Many of the 21 designated outsourcing cities have included the development of shared services in their implementation plans for the 12th Five-Year Plan. The explosion in the number of outsourcing vendors, to more than 12,000 by some estimates, has helped to provide a pool of talent which corporates can tap into for shared services. Technology and innovation are important enablers and many cities have also been supporting this initiative by including cloud computing along with their outsourcing strategic plans for the city. This can become interesting as the SSCs may also consider the adoption of these technologies. The push towards research and development will prompt companies into thinking about a higher value driven shared services function that will take up more analytics and research work in certain industries. The minimum wage consideration is becoming more prevalent for MNCs in light of the pledges in the Five-Year Plan to sustain increases in minimum wages to at least 16 percent annually. We have already seen companies moving their SSCs to new cities and provinces due to the faster rising cost in first-tier cities. This trend may continue in the next few years as companies are pushed for more value at lower cost. Changes in China s labour laws need careful consideration. As in many countries, labour regulations will become of greater concern as the headcount of an SSC increases, or the organisation considers relocating. Business drivers for shared services in China Multinationals State-owned enterprises Privately owned enterprises Drivers: Consistency Economies of scale Standardisation Enhanced service levels Better control and transparency Drivers: Access to global best practices Visibility of operations and focus on people management Process improvement Drivers: Consolidation Controls and process improvement Allows greater Board level focus on core competencies Necessities Absolute management commitment Organisation-wide restructuring Transformation mindset in corporate culture

20 20 Shared Services in China: Coming of age Maersk Webster Shao, Shared Services Head, China Maersk opened its first SSC in China in 2001, in Guangzhou and then acquired PONL s service centre in Shenzhen in Today it has a mature SSC infrastructure, with considerable scale and an ability to focus on optimising controls and processes, including through Lean management and six sigma techniques. Maturity and scale also bring certain challenges, including how to retain experienced staff at the junior management or team leader level. Our group CEO has articulated the value he sees from SSCs across the business, explains Webster Shao, the head of Maersk s SSC in China. The global financial crisis had a big impact on shipping lines and our response was to develop a fresh location strategy. In China, Guangzhou had become a less competitive location and change of direction was needed. Chengdu was opened in December 2009 and is now one of our strategic centres globally. Maersk currently has six SSCs employing 10,000 people, with the largest in Manila in the Philippines. The move to Chengdu was a daring one, at a time when the city was still building up a new high-tech zone and the Tianfu Software Park (TFSP). There were inevitably challenges in managing the relocation. Employees from the Shenzhen site were offered the opportunity to move and about 60 staff (mainly team leader and above) transferred. However the growth of operations in Chengdu since it opened has been so dramatic that the original contingent of staff are now somewhat diluted. The business has moved on to a new phase. As Mr. Shao explains, offshoring for some parts of the business only started last year [2010] but Maersk s Global Service Centres are now supporting all group business units. That means not just container shipping but also oil and gas, tanker and terminal operations. The Chengdu site currently focuses on customer service processes for the entire North Asia region, and also on finance processes including accounts payable and receivable, APMT terminal activities and some logistics. In other locations the SSCs also provide IT, sales and more knowledge-based business activities. Mr. Shao expects these functions will also expand to Chengdu in due course. Chengdu has now demonstrated its success we can expand from here, he says. We have started talks with the Chengdu government to commence the next expansion project. As the Chengdu site has grown, 60 percent of the work has come from other SSCs and 40 percent as incremental work coming directly from the front office functions. There are no plans to move beyond the captive model but Mr. Shao is expected to benchmark performance against other industry players. Key performance indicators are actually similar across industries, he explains. We are all dealing with internal clients so the indicators tend to be focused on two basic measurements - timeliness and accurate delivery. We have productivity targets for 20 percent improvement year-on-year and as we move to more high-value knowledge based tasks, timeliness is less of a priority. How we can partner with our internal customers to standardise, simplify and improve processes is becoming more of a focus. Commenting on Maersk s experience in Chengdu over the first 18 months of its operations, Mr. Shao says that overall we are quite happy with the support from the local government. They have provided what they promised. There are some policies and incentives coming down from the central level as well which we need to manage or harness to support our growth. Sometimes they need clarification or we need to work out the implications for our employees or different parts of our business. Compared with coastal cities, things can still take a little bit of time, but he believes Chengdu will continue attracting attention from multinationals and large domestic companies. I expect it will continue to grow dramatically for the next two years. After that it may naturally cool a little. The cost differential with coastal cities is closing as people seek out the right talent for their business, though it is still there, he adds. More widely, Mr. Shao believes SSCs have a further role to play in transforming shipping and logistics businesses. We continue to look for some revolutionary new approach to the shipping business the way to better serve our customers and have more visibility over the business globally. SSCs can be an engine for that kind of innovation, he says.

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22 22 Shared Services in China: Coming of age Sustaining growth Shared services are a means by which organisations can grow in a sustainable and efficient way. However, ultimately, how sustainable is the shared services model itself? Companies need to consider whether the timeframe for tax incentives or subsidies matches with their own development plans. Relocation has implications not only for their own business but for vendors and supply chain partners. History shows that as incentives phase out, organisations tend to start exploring new options and locations. China may be well placed for the short and medium-term, but it can also learn from the experiences that countries such as India are going through now. Companies also need to invest and adapt to the changing shape of the workforce. Urbanisation may help to fuel the growth of the SSC industry in many of the business and technology parks around China, but it may also be a double-edged sword as the local talent and training facilities may also need to improve at the same or faster pace. At present many executives admit the challenge is finding talent at mid-management level, but as China s demographics evolve, recruiting the most talented graduates and retaining a balanced workforce in terms of age and experience may take precedence. Looking ahead Are you adapting to the challenges and trends in SSCs, in order to sustain growth? Do you understand the nuances of talent management in China? Are you leveraging on most of the incentives offered by the government in China? After realising cost savings through a SSC, some companies may consider selling the mature SSC to BPO providers. Besides, a mix of captive and BPO functions will be created within most of the SSCs, which will also change their scope of processes from transactional-based over reporting functions towards decision support solutions. Newer SSCs will also leapfrog some SSC stages and be directly incorporated as hub-and-spoke models. A mix of captive and BPO functions will be needed to access specialist resources for specific topics like logistics, procurement and collections. Simultaneously the trend will move towards a multi-functional SSC and focus on further value-added SSC services for IT, finance and HR functions. From offering only local and national support, the SSC China trend is moving towards services offered regionally and globally in the future. Additionally the nature of services is expanding. Earlier, transaction processing was the main scope for building SSCs; today this trend moves towards performance analytics and reporting functions and lately also in offering decision support solutions. Newer SSCs tend to move directly to a hub-and-spoke model as tried, tested and effectively deployed by mature SSCs. This allows firms to fast track and leapfrog to substantial benefits that SSCs offer. Have you taken the right path along the SSC journey?

23 Shared Services in China: Coming of age 23 Trends among SOEs and POEs China s SOEs are using shared services to centralise functions such as finance and accounting, with the aim of improving control, enhancing transparency and better managing risk. To some extent they are doing this by learning from established players in the market and leveraging industry practice to achieve operational efficiency (through streamlined processes and automation), and more efficient allocation of resources (through the pooling of skills). Initial considerations are how to harness new technology and standardise technical and operational models. In this respect, SOEs are following a well-trodden path that many Western organisations have used by establishing pilot sites or virtual centres to prove the concept before committing to a larger investment. Forming a more collaborative approach in the early stages of development, by involving all impacted parts of the business and operations from the outset, has proved critical. Developing an SSC model can place many demands on existing management, particularly in terms of process analysis and new process development. In many areas, the major driver for SSC development has been to centralise the financial functions and thereby improve risk management and control. For many SOEs, we can see that senior management at the group level are committed to developing their SSC to leading industry standards. This commitment can be even more critical given the need to meet regulatory authorities risk control requirements while leveraging the SSC as a platform to achieve broad financial transformation. For organisations that have grown rapidly, the transformation process can enable a clearer separation between the accounting operation and financial management. Process development and optimisation have thrown up some interesting challenges and forced new forms of collaboration across businesses. There is often a realisation of the importance of engaging IT throughout the process to understand how changes to systems, processes and HR can be implemented and where changes to the IT system itself may be needed. Having strongly emphasised process design at the outset, management will be in a better position to consider how to optimise the operation through the right performance management criteria. Compared to SOEs, POEs tend to be more focused on scale and consolidation. This means having the right location that allows the development of a service centre that is strategically placed to support a branch network. Many POEs are focusing on cost and margins and looking for opportunities to strip non-core activities and operations out of the branches. The tangible benefits of this are better control and transparency of management information and regulatory reporting, and most importantly, allowing the business to focus on the market. POEs are leveraging technology to deliver process efficiency and automation, but typically on a smaller scale than SOEs. The volumes going through these service centres are more transaction-based and focused on back office operations. In many cases it is the SOEs that are taking the most ambitious cross-functional approach, for example exploring how finance, technology and operations can work together rather than in silos. Although the industry environment and government policies have encouraged SOEs and POEs to consider SSC development, every organisation will continue to face different challenges given the unique characteristics of shared services in China. The development of an SSC model has often provided many new insights into operations as well as areas of opportunity to further streamline or enhance the business. Shared services can help SOEs and POEs change the way their operations are managed and the metrics that management are measured on, for example allowing a greater focus on customer service.

24 24 Shared Services in China: Coming of age Concluding remarks 1. There are strong central and provincial incentives. The central government has put services at the top of their economic agenda. 2. Infrastructure, education, a growing talent pool and experience all provide a great platform. 3. Leading industry players are here already, or considering how to incorporate China into their global and regional shared services strategies. 4. China already has the largest number of captive R&D centres than any other country. 5. China s SOEs and POEs are also developing shared services.

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26 26 Shared Services in China: Coming of age About KPMG KPMG has been ranked in the top five Advisors for shared services and outsourcing for three years in a row 2011 World s Best Outsourcing Advisors KPMG is a network of professional firms with over 138,000 people working in 150 countries around the world. Our high performing people mobilise around our firms clients, using our expertise and insight to cut through complexity and deliver informed perspectives and clear solutions that our firms clients and stakeholders value. Our client focus, our commitment to excellence, our global mindset and consistent delivery build trusted relationships which are at the core of our business and reputation. Shared services Through our shared services offerings, we are committed to helping our clients achieve continuous improvement, leverage common IT solutions, and simplify and standardise their control environments KPMG s global team includes 350 professionals worldwide with an average of seven years of experience in the shared services industry. The practice has an established presence in ten countries and a developing presence in seven more countries across Europe and Asia. With a global Shared Services Centre of Excellence in Shanghai and a single methodology that standardises the way we work on a global basis, KPMG can deliver exceptional service and the benefit of accumulated industry experience. Thought leadership KPMG member firms provide a wide range of studies, analyses and insights covering strategy, technology and business transformation issues. For more information, visit kpmg.com or kpmg.com/cn A New Dawn: China s Emerging Role in Global Outsourcing Inside the Dragon: Outsourcing destinations in China KPMG Pulse Survey: Shared Services and Outsourcing in China China Executive Insight newsletter series The State of the Nation Shared Services Centres in China

27 Shared Services in China: Coming of age 27 Contact us China Shared Services and Outsourcing Advisory (SSOA) Global Ning Wright Partner-in-charge China Shared Services and Outsourcing Advisory Tel +86 (21) Egidio (Edge) Zarrella Clients and Innovation Partner, China Consulting Tel James O Callaghan Partner, Advisory Tel [email protected] Alan Fung Partner, Advisory Tel +86 (21) [email protected] Wing Fong Partner, Audit Tel +86 (755) [email protected] Christopher Xing Partner, Tax Tel [email protected] Linda Lin Partner, Advisory Tel +86 (21) [email protected] Anson Bailey Principal, Business Development Tel [email protected] Mark Toon Global Leader Shared Services and Outsourcing Advisory KPMG in the US Tel [email protected] Herrman Cheung Partner, Advisory Tel +86 (10) [email protected] James Pang Partner, Advisory Tel [email protected] Li Fern Woo Partner, Audit Tel +86 (21) [email protected]

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