ACCOUNTS RECEIVABLE
Receivables Shared Services Centres in Asia
December 4, 2006
Sandip Patil, Citi

Shared services centers (SSCs) are not a new phenomenon in Asia. Sometimes referred to as 'payment factories', most SSCs have successfully expanded to handle support services such as payroll, travel and entertainment processing, etc. Operational efficiencies coupled with labour costs helped SSCs deliver up to 40% cost savings, according to AMR Research, and SSCs have successfully evolved as centres of excellence in these areas. The question now is, 'What's next?' Companies need to continue to examine their business model to deliver additional value to enterprise and clients. Receivables and payables are two basic building blocks of the working capital cycle. Considering the synergies and capabilities that SSCs encompass, centralizing end-to-end receivables processing is the next logical step.

Receivables SSCs: Trends Towards Centralization

Managing receivables has historically been a complex and challenging process in Asia. However, if you take a closer look at recent developments, you will notice some positive changes. Changing buyer behaviour, seller end-process improvements, and market infrastructure changes in many countries are driving the automation and centralization of receivables processes across Asia. In our opinion, this is the right time to centralize receivables management into your existing SSC or establish a new receivables SSC.

A number of factors are helping to drive companies centralizing their receivables management process into an SSC. These factors include:

1. Changing buyer behaviour. Buyer behaviour overlaps the entire receivables cycle from order initiation to reconciliations. A disciplined buyer behaviour translates into timely and accurate payments as well as information that is critical to managing receivables. This behaviour has been changing favorably in the past few years. This change is driven by two causes. Because of the consolidation of the number of sellers in many industries, most sellers today have the scale and strength to help them bargain their terms with buyers. Similarly, the reduced number of sellers is forcing buyers to comply with agreed terms, which results in good reputation and credit scores. Furthermore, compared to the unorganized distributors and retailers, the organized buyers have gone a step ahead. They are putting an end to ad-hoc payments that lead to unpredictability of funds flow at their end as well as loss of reputation in the market. Overall, consistency and predictability of receivables is far better today, and improving.
2. Seller end process improvements. 'Single instance of ERP' with synchronized internal processes have become common these days and are responsible for driving standardized receivables processing across various countries. Process re-engineering and adoption of industry's best practices have further improved the receivables process efficiency. Emphasis on accounting and risk reviews such as the Sarbanes-Oxley Act have encouraged companies to question localized processes and this has improved many such processes. Managing buyers and payment practices was considered to be a local skill due to behavioural issues displayed by buyers. Technological tools are now available for clients to document complex buyer behaviour and customize SSC processes to cater to such buyer behaviour. Overall, the seller end environment is far more conducive to centralization of clients and receivables management activities.
3. Market and infrastructure changes. The market and infrastructure in Asia have shown tremendous positive changes in the past few years. Fragmented and paper dominant clearing systems coupled with multiplicity of payment channels meant a local touch was required. Electronic payments are expected to bring in the required efficiency and reduce the local nuances to the payment process. The paper-to-electronic trend is strong in Asia and visible in paper dominant markets such as Malaysia and India. On the other hand, technological tools like optical character recognition (OCR) and 2D bar coding are helping companies and banks manage the paper challenge and deliver electronic output to users. Banks have established the standardized processing rules across markets and have also invested in the infrastructure that consolidates and harmonizes information across these markets. These improvements complement the traditional offering, providing flexibility and convenience to buyers in terms of how, where and when to pay.

With an integrated receivables management approach, companies have access to varied collection channels to suit the local market and buyer requirements. Our integrated receivables processing platform provides consistent transaction information, including enriched data across all available channels. The receivables reports are delivered in industry standard formats for automated receivables posting into your enterprise resource planning (ERP) system.

Considering all the above factors, we think the current environment is conducive to centralizing the receivables management process into a centralized environment.

Once you decide to centralize receivables, 'where to start?' is an important question. There are four basic steps in the end-to-end accounts receivables cycle: order management, invoicing, collections and reconciliation. All these processes can be centralized into a receivables SSC. There will be few exceptions like door-to-door collections but SSCs can still play a centralized monitoring role in managing such activities. Many clients tend to start with reconciliation activity but it is recommended to have a clearly defined roadmap to ensure end-to-end centralization.

Benefits of Centralizing Receivables into an SSC

A shared service center delivers quantifiable advantages along your entire value chain. Some of the primary benefits include greater efficiencies from consolidation, lower error rates from standardization and automation, and better liquidity management through efficient cash flow forecasting.

Centralizing receivables brings additional benefits. Cost savings come from reduction of, and control over, day's sales outstanding (DSOs). This is a direct result of monitoring collections from a centralized location because buyers tend to comply with payment terms given the arm's length nature of SSC operations from the sales department. Furthermore, visibility to, and understanding of buyer-level DSOs at a regional management level, will help push the right pricing decisions across the organization which then translates into well-controlled DSOs.

Improved operational efficiency in terms of automated reconciliations, higher transaction matching rates and faster reconciliation cycle are other key benefits. This results in lower operational costs, improved customer service, as well as increased sales in terms of faster release of credit lines.

SSCs are also in a better position to implement operational best practices across countries. Consider, for example, the insurance industry which is facing challenges like applying premiums to policyholders quickly and accurately. Capturing policy numbers as payment reference numbers is only partly successful in meeting this challenge. Hence, we introduced a virtual account solution that has enabled insurance companies to instantly apply the cash and then send a confirmation to the policyholder. If you pilot this in one country as an SSC, you are in a better position to drive implementation across other countries, compared to a decentralized set-up.

The Way Forwards

The challenges of the past are now opportunities to build on for the future. For companies examining their value chain, the question is not so much on 'whether to centralize receivables' but rather, 'how quickly can it be done?' We are convinced that this is the right time to ride the wave.

Case Study on Centralizing Receivables

One of the largest consumer goods company in the world known for its high quality and customer satisfaction, was one of the first to set up a shared service center in Asia. A few years ago, the company added receivables management to its SSC. The scope of activities included centralizing the entire gamut of receivables activities across a dozen countries in Asia Pacific.

As an ideal starting point, a comprehensive plan covering all the activities in the 'order-to-reconciliation' cycle was finalized, with senior management support for the project from all affected areas in the organization. The methodical and phased manner of implementation ensured that enough time was spent in studying local nuances for each activity in the receivables process.

Replicating 'country desks' that handled critical client management activities in a SSC environment supported the migration. Country desks were staffed to provide local language support so that buyers in countries enjoyed the same level of customer support that they were used to. This simulation of local environments in the SSC set-up in the initial phase was a critical and now a common approach adopted by many companies while centralizing their receivables function.

Accurate and timely documentation of customer behaviour over a period of time was an important factor that helped the company during the process of implementing standardization of individual processes across markets. Detailed processing consistency across countries was done in a phased manner across the various functions, ranging from order management to reconciliations.

The company's banking partners played a critical role in providing local services and in introducing a level of consistency in value-dating, information enrichment as well as consolidated industry-standard receivables reporting that is required for SSC operations.

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