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Incorporating the back office

In the outsourcing industry, the term “your mess for less” refers to the lower cost of contracting out support services. Firms are finding the term is as useful to describe the impact of outsourcing centralized back office units – also referred to as shared services operations – which are spun off to boost the efficiency of the individual units and the Group of which they are a part. Shared services units are usually set up by diversified and dispersed corporations to manage day-to-day finance, procurement, logistics, HR and so on from the headquarters (HQ).

Besides managing shared services, corporate headquarters perform more important ‘parenting’ roles like strategic planning, enforcing corporate governance and administrative roles like filing taxes and raising capital.

The largest Sri Lankan businesses – the giant apparel companies and diversified firms like JKH – have begun to set up shared services units. However, worldwide, shared services spanning businesses are being progressively unplugged from the corporate HQ. So for firms here to combine their splintered finance, procurement and HR divisions into one will suit the business’s needs for clarity and lower cost. However, to create a HQ-based unit to do this makes little sense because that would burden the group management.

Corporations are dealing with this by parceling out shared services to where it can be done best. Often they are offshored to cheaper locations like Sri Lanka. Large firms here are adapting this strategy, setting up shared services subsidiaries to handle both Group and outside work.

H Connect is apparel manufacturer Hirdaramani Group’s shared services operations, which has centralized most of the finance work. What started as a pilot project in October 2012, consolidating accounts payable seven months later, now manages over 90% of the Group’s Apparel sector’s finance transaction volumes. The shared services operation will eventually be the back office for the entire group.

Hirdaramani is synonymous with apparel, but has diversified over the past few decades. Hotels Hilton Union Residencies and Vivanta by Taj , luxury wristwatch retailer Chatham, jeans brand LiCC and stock brokerage First Guardian are all group-owned ventures outside apparel. Because the back offices of the subsidiaries functioned independently, the group had become a vast machine with non-value-added activities and a lack of uniformity.

As expansion continued, shrinking costs and inefficiencies became paramount. However, instead of running shared services alongside more important headquarter functions, Hirdaramani Group leapfrogged by spinning off shared services and incorporating H Connect. H Connect is group owned but already offers accounts outsourcing solutions to third parties too, because it’s an independent firm that provides services for a fee to even its parent.

Hirdaramani established the shared services unit to improve customer service and control environments, increase management information accuracy, make transactions transparent and achieve process excellence. The group wanted to do all this without adding to costs. It also felt an independent shared services unit may help strike a better balance between group objectives and business unit requirements.

“We need to focus on value addition,” says Dilush Perera, the Chief Executive of H Connect. “Though we expect finance units to follow the same processes, some businesses don’t do this. But bringing it under one compliance head drives that behaviour.”

H Connect reconciled more than 100 bank accounts through automated bank reconciliation, and today a team of four handles these. The company has so far automated only the accounts payable, but expects to automate collection too. A first necessity was a document management system (DMS). Because purchasing one was costly – the company found it costs over $200,000 – H Connect worked with Hirdaramani’s IT company, H One, to develop a system that could be integrated with the group’s enterprise resource planning (ERP) system. This cost only a quarter of what it would’ve paid for a third-party DMS.

“You need to bring technology along with shared services,” says Perera. Because the technology partnership is crucial, the two firms are located in the same building. H One is also a Hirdaramani subsidiary and partners brands like Microsoft, Adobe and Kaspersky to provide infrastructure and business solutions, and also offers IT consulting.

The pilot project was launched in the group’s biggest sector, apparel, after H Connect standardized finance processes, transferring accounts payable, receivable and bank reconciliation. The transition involved finance, stores, administration, human resources, merchandising and export departments.

When a company’s operations are distributed, it is difficult to see things as a whole. But a document management system provides visibility into any aspect of the firm. “For example, when we want to know the number of suppliers in our database, this system provides it in one go,” says Perera. “If we want to know how many 100% poly-cotton yards we buy per month, we can find out because we bring all that information to one location.”

The system also allowed the group to standardize its payment terms. The group discovered that different factories had been buying from the same suppliers on different terms. Centralizing this function enabled the group to find the best rate given and negotiate it for all the companies.

In a case study published by Sri Lanka’s IT and BPO industry umbrella association SLASSCOM, H Connect identified customer satisfaction as one of the system’s biggest impacts

Since the DMS records all invoicing and payment, factory users can log in to it to track an owed payment. There’s no longer a need for telephone or email follow-up. In a case study published by Sri Lanka’s IT and BPO industry umbrella association SLASSCOM, H Connect identified customer satisfaction as one of the system’s biggest impacts. For internal customers, the DMS introduced greater transparency and payment tracking compared to the previous system handled by individual factory based finance teams. For external customers, the shared services unit provided an efficient follow-up mechanism and quicker turnaround.

Hirdaramani first toyed with the idea of a finance and accounting shared services unit in 2000. However, according to the SLASSCOM case study, the group’s directors decided to decentralize a year later when it became clear that the plan wouldn’t succeed, as it was just a “lift and shift” solution rather than true centralization.

Starting small in 2012, H Connect has now grown to more than 100 people. The company aims to grow to 200 to 300 heads soon and to over 2,000 people in a few years, according to Perera. Dealing with people’s insecurities about change has been a challenge in introducing and scaling the system. Some finance heads at factories were reluctant to release experienced finance personnel to support the project. So H Connect recruited a project team and explained the benefits of the project to the dispersed finance teams. “Rather than forcing them to change, we had to show them its benefit. At first, teams weren’t convinced, but they eventually asked us to take over their burdensome tasks to manage.”

H Connect is now expanding to cover human resources services such as payroll. It will then move into project management and consultancy. It currently has a small consultancy team, which it plans to grow.

H Connect says its success will be correlated to its ability to convince stakeholders of the benefits of outsourced shared services. As a result, it actively focuses on reducing interest and transaction costs. For instance, bank accounts can be merged, leading to reduced transaction costs. A document management system generates reports, highlighting areas that require attention and pending tasks. It highlights weaknesses in processes too.

At the end of the first year, customer satisfaction was at 76%, with that percentage of respondents saying that, given the chance, they wouldn’t want to take back the now outsourced shared services. “That was just the first year result,” says Perera. “I’m sure we’ll improve as we go on.”

Hirdaramani’s began as a retail store on Chatham Street, specializing in one-day suit delivery for passengers and sailors on ships docking in Colombo harbour. The shop eventually expanded into garment manufacturing in the seventies. Though the group expanded overseas after some factories here were destroyed in the 1983 riots, it never stopped investing in Sri Lanka. Today it has over 20 factories islandwide, with the two most recent being in the former war-torn Northern Province in Pudukuduririppu and Vavuniya. H Connect services all of these units.

In the short term, H Connect will move to a new location in Colombo, which will eventually accommodate 200 to 300 people. But the company has conducted a location study on the talent pool and accessibility with an aim to relocate in the long term. It is considering a location in the western, southern or central province.

“I don’t think the biggest talent pool is in Colombo,” says Perera. “Our garment factories were initially set up close to Colombo, but as we grew we had to either bring the talent to Colombo or set up factories outside Colombo. We went with the second option. Even for the BPO industry, there’s a lot of talent coming from outside the city.”

H Connect has also begun to outsource its services. It now has two clients – a US auditing firm for which H Connect does tax and accounting work and an entertainment industry client for which H Connect provides research and analysis services. The company thinks that this side of the business will grow rapidly.

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