Marc Stark, Director, Shared Services and Outsourcing Advisory

The Extended Global Enterprise (EGE) is the next level of maturity in global business services. In this model, leading companies are going beyond labor arbitrage and transactional processing. Instead, they’re breaking down functional silos and assembling capabilities – whether retained, outsourced, shared or distributed around the world – into seamless processes.

Ultimately, any enterprise of scale will eventually need to pursue an EGE to continue delivering value in global services. But some organizations may be farther along than others. If your sourcing strategy is still uncertain, what should you do with your outsourcing contracts in the meantime?

The key is to build flexibility into long-term outsourcing agreements, enabling you to move forward with service delivery while the strategy takes shape. With the right contract structure, your current relationships can eventually be subsumed into a larger EGE initiative.

To keep your options open, consider stipulations such as the following:

• non-exclusivity, permitting you to use more than one service provider
• partial termination rights, enabling you to turn off certain parts of the services
• discrete pricing elements, ensuring that services in your contract are priced separately
• optimized term length, creating flexibility while enabling providers to recoup their costs.

Keep in mind that just because an EGE may be on the horizon doesn’t mean you have to renegotiate every deal. You may have the flexibility you need in smaller, shorter-term agreements. For others, it may come down to timing: Depending on the schedule for an EGE implementation, it may make more sense to let your contract ride out than to renegotiate it.

The point is to look at your current contracts with an eye to the future, addressing short-term tactical requirements while keeping a flexible position should the strategy change.

For more information on creating flexibility in outsourcing contracts, please see our paper Keeping Your Options Open with Flexible Outsourcing Agreements. For more from KPMG on this topic, visit the KPMG Shared Services and Outsourcing Institute.

Filed under: Contract Review & Negotiation, Global Business Services, Outsourcing by EquaTerra
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Jim Low, FS Audit Partner / Leader Americas FS Center of Excellence, KPMG LLP (US)

Signed into law in July 2010, the Dodd-Frank Act places regulation of the financial industry in the hands of the federal government. With its overarching goals of promoting the financial stability of the United States through improved accountability and transparency, and protecting consumers, certain provisions of the Act will have accounting implications for financial (and indirectly, some non-financial) companies. Although subject to change as U.S. regulators and lawmakers hash things out, let’s take a quick look at several of the provisions and their accounting consequences, as they stand today.

Asset-backed Securities

Section 941 of the Act requires any securitizer to retain an economic interest in a portion of the credit risk for any asset it transfers, sells or conveys to a third party through the issuance of asset-backed securities (ABS). Six federal agencies have proposed a rule that would require ABS sponsors to retain at least five percent of the credit risk of the assets underlying the securities, unless certain exceptions are met. And under the proposed rule, securitizers would be prohibited from directly or indirectly hedging the credit risk they are required to retain.

Potential accounting implications:

• If a company that normally sells loans and receivables through securitizations determines the risk retention provisions apply to its current programs, it must then decide whether the financial assets transferred to the securitization vehicle must be derecognized.
• In assessing derecognization, the company must first assess whether the securitization vehicle requires consolidation. It must then determine whether it should derecognize the financial assets transferred (or participating assets transferred) under the requirements in ASC Topic 860, Transfers and Servicing.

 Executive Compensation

Seven federal agencies have proposed a rule that would implement Section 956 of the Act, wherein covered financial institutions with more than $1 billion in assets would be prohibited from adopting incentive-based compensation programs that would expose them to inappropriate risks or material financial loss. Additionally, larger financial institutions – those with consolidated assets of $50 billion or more, or $10 billion or more for credit unions – would be required to defer payment of at least 50 percent of covered employees’ annual incentive-based compensation for at least three years.

Potential accounting implications:

• Institutions implementing the minimum three-year deferral period proposal should analyze – via ASC Topic 718 – how to account for share-based compensation, including when the delivery of the underlying shares is restricted beyond the vesting date. Affected financial institutions should also clarify deferral and clawback provisions, which may impact the determination of the grant date for share-based compensation arrangements.
• Companies making modifications to existing compensation arrangements will need to consider the applicable ASC Topic 718 guidance related to beneficial and non-beneficial modifications of equity-settled awards.

 Over-the-Counter Derivatives

Under the Act, many swaps that are currently executed in the over-the-counter (OTC) market will be required to be cleared through derivatives clearing organizations, unless the organizations do not accept the swap for clearing. Swaps not cleared through a clearing organization would be reported to the Commodity Futures Trading Commission, the Securities and Exchange Commission or a swap repository. Although the function of clearing organizations is still being determined, it is believed they will become central counterparties to many swaps.

Potential accounting implications:

• To the extent clearing organizations become central counterparties to swap transactions and/or collateral maintenance is required, fair value measurements of swaps will be different as they will need to take into account counterparty credit risk and collateral.
• Use of clearing organizations as central counterparties may also impact a company’s eligibility to offset swaps in its balance sheet.
• An assessment will need to be made to determine whether the exchange of one counterparty to the swap for a different counterparty would result in the swap being accounted for as the continuation of the existing swap or an extinguishment of the existing swap combined with the issuance of a new swap.

 For more details on the above provisions and their potential accounting implications, as well as discussions on The Volcker Rule, Living Wills and Conflict Materials, please read the KPMG paper, “The Dodd-Frank Act: Could there be Accounting Consequences?”

Filed under: Financial Services Industry by EquaTerra
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Rick Bertheaud, Principal, Management Consulting

High-performing shared services organizations go well beyond the basic value proposition of efficiency and effectiveness. They focus on customer relationship management (CRM) to improve their strategic relevance, deliver long-term value and elevate the shared services brand.

But CRM is just the beginning. The next step is to evolve from managing customers’ relationship with shared services to managing their experience. The discipline of customer experience management (CEM) turns customer satisfaction into loyalty and advocacy for shared services.

How do you get there? It comes down to managing every customer and consumer touch point. Consider these key principles for CEM:

• Evaluate your customer engagement model. Are you taking advantage of all communication channels? Are you developing strategic messages about shared services? Stay in touch with customers to gather feedback and concerns, keep in front of emerging business issues and manage your message.
• Consider your organizational structure. Part of staying relevant with the customer is assessing your leadership team and governance. Do you have the right skills? Are you focusing on areas such as communication and change management, customer engagement, risk and compliance? The right leadership skills are an important part of the customer experience.
• Design the right offers and experiences for the right customers. Look beyond transactional services to develop experiences that delight customers, provide strategic value and create brand advocates.
• Focus the entire shared services organization on delivering the experiences. Consider creating cross-functional teams to determine customers’ needs; then deliver on them by measuring experience-oriented objectives.
• Develop the capability to please customers again and again. Loyalty and advocacy come from consistently great service, not from satisfaction that spikes in one month and plummets in another. So provide effective training, establish direct accountability for the customer experience, and look for new ways to measure it while creating meaningful insights.
• Converge all services into a brand experience for customers. Simplify complexities for customers, develop effective communications and reporting materials, and consider appointing service delivery managers to serve as the primary point of accountability for customer satisfaction.

 
Add it up, and CEM – with the goal of delighting customers and creating loyal advocates – can change the way the SSC provides value.  For more insights on CEM for shared services, please see my paper From CRM to CEM: Taking Your Shared Services Brand to the Next Level.

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Stan Lepeak, Director, Global Sourcing Advisory Research
Vicki Phelan, Director, Shared Services and Outsourcing Advisory supporting the Pharma and Life Sciences Industry

KPMG Management Consulting recently completed a market study assessing how North American-based medical device firms are approaching efforts to improve to global business services (GBS). Other KPMG research conducted across multiple industries typically finds firms employing a mix of shared services and outsourcing efforts, along focusing on improving efforts already in the field, as the top means to achieve these goals.

While shared services and outsourcing are tools being employed in the medical device industry, the more traditional approaches of internal process improvement or process re-engineering was the top means cited both to improve service delivery as well as reduce service delivery costs (see figure below).

Top Means to Improve Service Delivery/Reduce Costs

KPMG research and client experience has found that many organizations feel that process improvement efforts can only take them so far. Often more radical change, in the form of shared services or outsourcing, is required to take efforts to the next level. It is possible that for participants in this research study greater use of shared services or outsourcing could result from the process improvement efforts. Or it could be that medical device firms place less value on shared services or outsourcing, though the study did find satisfaction levels with outsourcing for those firms that had undertaken it in line with other research findings.

For many adopters, shared services have delivered early gains but then improvement efforts have slowed or stagnated and outsourcing efforts have hardly been the panacea envisioned by some of its adopters. This being said the use of shared services and outsourcing continues to grow. Recent research conducted by HfS Research found that across major industry groups more than 70 percent of firms currently using outsourcing plan to expand efforts in the next three years and more than 50 percent of shared services users plan to increase those efforts. It’s these growth levels that create the foundation for and drive the maturation of global business services.

The best means to improve business services delivery and improve cost levels will vary across different industry groups as well as geographies and economies. It is important, however, that organizations assess all available options and tools as their disposal, recognizing the best solution is often likely a complex mix of multiple means and methods.

For more from KPMG on shared services and outsourcing, visit the Shared Services and Outsourcing Institute. For KPMG’s latest thinking in the Healthcare industry, visit the Healthcare and Pharmaceutical Institute.

Filed under: Global Business Services, Market Trends and News, Outsourcing, Shared Services by EquaTerra
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Stan Lepeak, Director, Global Research, Management Consulting

Research on the subject of emerging trends in cloud computing usage for KPMG’s global cloud Pulse survey looked at what is driving the adoption of cloud computing by end-user organizations. A primary driver typically cited in the market today is reducing IT costs and this was supported by these research findings. This goal has of course had particular appeal to organizations during the difficult economic times that have pervaded western markets over the past four years.

KPMG firms’ consultants in the global cloud Pulse were asked to rank on a one-to-five scale, where one represents very unimportant and five very important, the importance of four sets of drivers for cloud adoption. These factors were:

• Economic (e.g. cost savings, shift capital expenditures to operational expenditures)
• Functional (e.g. speed to solution, functional capabilities, everywhere accessibility)
• Technical (e.g. flexibility, scalability, simplicity, security, advanced technology)
• Strategic factors (e.g. business process transformation, linkage to business partners, speed to market, focus on core competencies)

Drivers for Cloud Adoption

All four factors were ranked relatively equally (as they have been in other KPMG supported research). While it is good that, in the view of KPMG consultants, buyers have a well-rounded set of drivers for their cloud efforts, it is also important to determine and understand if any of the elements of the drivers are conflicting or contradictory. Typically, for example, it is harder to improve process performance while simultaneously reducing process costs than it is to simply cut cost; or specifically to the cloud, a functional factor such as everywhere accessible may challenge a technical driver such as security.

Results are based on surveys and interviews with over 400 of KPMG’s consultants across our global network of member firms from the Management Consulting and Risk Consulting service lines. Further information about the drivers of cloud computing adoption and other areas of cloud computing such as functional areas of adoption and end-user cloud skills and capabilities are available in the full cloud Pulse report.

The cloud Pulse complements and extends research findings from the cloud market study KPMG conducted with Forbes Insights. Further information about Pulse surveys is available here.

For more on Cloud, visit www.equaterra.com/cloud.

Filed under: Cloud Computing, Market Trends and News by EquaTerra
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Stan Lepeak, Director, Global Sourcing Advisory Research

Over 400 of KPMG’s consultants across our global network of member firms have provided their insights from the ‘front lines’ of cloud computing usage for the inaugural KPMG global cloud Pulse survey. On the subject of cloud adoption levels globally, it was interesting to see that just seven percent of KPMG firms’ consultants indicated that their prospect and client accounts currently had no material interest in or activity around cloud computing – a strong endorsement for the view that cloud usage has become commonplace.

In addition, 57 percent of consultants indicated that client organizations were actively deploying or had already launched one or more cloud computing efforts. Another 33 percent of consultants responded that clients had an interest in cloud computing but had no material activity underway.

Cloud Adoption Levels

Key to interpreting the results on this point is the emphasis on the level of cloud activity being ‘material’. For example, if employees’ access to personal cloud-based e-mail constitutes cloud adoption, virtually all organizations are cloud users. The emphasis of this cloud Pulse, however, is on usage by larger sized organizations of core business and IT applications that historically were provided in a client-server or mainframe model, either by the client organization or by a third-party outsourcer.

Results from the cloud Pulse are based on surveys and interviews with advisors globally in KPMG member firms’ Management Consulting and Risk Consulting service lines.  The cloud Pulse complements and extends research findings from the cloud market study KPMG conducted with Forbes Insights. Further information about Pulse surveys is available at equaterra.com/pulse.

Filed under: Cloud Computing, Market Trends and News by EquaTerra
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Anna Marie Detert, Director, People & Change, KPMG in the UK

The creation and operation of a shared service centre is a significant investment for an organisation, yet the way staff are managed and motivated often reveals opportunities to increase their value, whether located on or offshore. While companies may have sophisticated human resource strategies for core parts of their business, the staff chosen for their shared service centres are often hired locally, subject to high attrition and not seen as critical talent since they are associated with non-core activities.

Organisations which view their shared service centres as low cost providers of low value services are likely tolerating the underperformance of a valuable people resource. As centres’ capabilities continue to evolve, organisations are potentially missing an opportunity to improve services to internal and external customers through more empowered staff.

However, shared service centres are maturing and increasingly able to provide more ‘higher value’ services, for example knowledge processing activities such as market research and business analytics, rather than administrative, transactional work only. These centres are becoming an increasingly versatile and valuable resource – moving towards becoming operational centres of excellence.

There are a wide range of opportunities available to organisations to help empower their shared service centre workforce to increase their output and value. This empowerment starts even before staff are hired: the recruitment target profile, employment offer and career and skill plan are key elements to get right. Once hired, staff need a productivity-enhancing environment that provides variety, autonomy and new skill acquisition, in order to retain and engage these increasingly important employees. So in the continuous search for competitive advantage, take full advantage of the productivity potential in shared services centres – treat your people assets with care.

To read more about this subject, please see the full article Maximising the Value of Shared Service Centres through Better People Practices .

Filed under: How to..., Offshore & Captive Centers, Shared Services by EquaTerra
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Steve Salmon, Global Cloud Centre of Excellence Lead, KPMG in the UK

Karl Flinders of Computer Weekly makes an interesting observation on his blog on the subject of the adoption of cloud services when he writes, “A year ago everybody was talking about the cloud. But there was not much context to what they were saying. But this year…I can see things have really moved on.”

KPMG firms’ advisors around the world are also seeing client organisations increasingly focus on cloud computing and their insights have been captured in KPMG’s inaugural global cloud Pulse survey. The conversations around cloud in the market have moved on from a strong technology bias to a more balanced discussion between IT and the business. As the market matures and overall consumer take up moves from experimental to implementing business function point solutions and wider, increasingly the discussion is more around the transformational benefits of cloud adoption and not just potential cost savings. Yes, cost is clearly a driver for cloud adoption in many consumers, but businesses are looking to the agility of the cloud-enabled IT platform, offering the potential to reduce the time to market for new products and services, enhancing competitiveness and thereby increasing shareholder value.

Results from the cloud Pulse are based on surveys and interviews with advisors globally in KPMG member firms’ Management Consulting and Risk Consulting service lines.  The cloud Pulse complements and extends research findings from the cloud market study KPMG conducted with Forbes Insights. Further information about Pulse surveys is available at equaterra.com/pulse.

Filed under: Cloud Computing, Information Technology (IT), Market Trends and News by EquaTerra
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Dave Brown, Principal, Advisory Services

When you established your IT outsourcing agreement, you probably did the deal and put it in a drawer, so it may have been a few years since you’ve thought about IT contracts. But now that your contract is coming up for renewal, how can you make the most of the next generation?

The IT outsourcing market has matured since you signed your original deal, and price is no longer the No. 1 driver. Indeed, there’s only so much you can squeeze your service provider on price before you start squeezing quality as well. Instead, next-generation deals are about improving service delivery, managing risk, staying current with the IT market, and positioning your business for an uncertain future.

As you prepare for renewal, consider these five factors:

1. Partnership and innovation. Look for your service provider to step up as a true partner on innovation. That could mean making investments to solve problems or providing industry insights to help you excel against the competition.
2. Cloud computing. Cloud solutions are not one-size-fits-all, so make sure your contract has the right solution for your company’s needs.
3. Flexibility. As your business continually adapts to the marketplace, your ITO agreements should be adaptable as well – in terms of the commercial offering, contract terms, staffing and delivery location.
4. Price. Price will always be important, but keep in mind that next-generation contracts usually don’t offer as much opportunity for price reductions as the first time around. Remember that a myopic focus on price can threaten the quality of operations.
5. Cross-functional service delivery. Consider how IT services can drive new value by improving back-office functions throughout the enterprise.

To learn more about these considerations, please see our white paper IT Outsourcing: The Next Generation. For more from KPMG on this topic, visit the KPMG Shared Services and Outsourcing Institute.

Filed under: Cloud Computing, Contract Review & Negotiation, Information Technology (IT), Outsourcing by EquaTerra
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Stan Lepeak, Director, Global Sourcing Advisory Research

KPMG recently released a comprehensive global market study on cloud computing adoption and usage.  On November 15th, I will be leading a webcast discussion related to the study.  An initial analysis of the results identifies some interesting findings.  One of them is the disparity of cloud services adoption rates among businesses across major geographies.

Organizations in Asia Pac (51 percent of respondents from China, and the balance from Japan, Australia and India) are adopting cloud computing services at a faster pace than their peers in North America (US 82 percent, and the balance from Canada and Mexico) or Western Europe.  Thirty-one percent of Asia Pac respondents (198 out of a total of a total sample size of 806 end-users) indicated that their organizations have fully implemented a cloud environment compared to 23 percent in Western Europe and just 20 percent in North America.

And it is not as if the higher adoption rate is fueled by throwing money at cloud aspirations.  Eighty-six percent of Asia Pac respondents indicated that cost reductions and/or savings are a necessary prerequisite for their organizations to move to a cloud environment.  This compares to seventy-two percent of Western European and seventy-one percent of North American respondents.  Additionally, a higher percentage of  Asia Pac firms than North American or Western European indicated that required costs savings need to be in the 11-25 percent range (vs. 1-10 percent).

Asia Pac organizations are utilizing all cloud computing models (e.g., private, hybrid, public) to drive deployment.  In each of these three categories, a higher percentage of Asia Pac respondents than North American or Western European cited use or intent to use each of these cloud computing models.

There are several potential reasons why Asia Pac organizations are more rapidly adopting cloud computing.  One is that firms, especially in rapidly growing markets such as China, have more discretionary funds to invest in cloud computing services.   They have the need to support quickly expanding market requirements and are rapidly innovating their delivery models and support systems.  These same organizations, especially in China and India are less likely to have the legacy IT baggage (e.g., homegrown IT systems, dated and bloated commercial enterprise software systems) that slows and complicates many Western firms cloud adoption plans.

Regardless of the drivers, assuming there are true benefits to end-user organizations of adopting cloud computing, these adoption trends are advantageous to Asia Pac organizations and, if they continue, could potentially create or expand competitive advantage against Western peers.  More aggressive use of cloud computing services could enable Asia Pac firms to more rapidly catch-up and even some (many?) could surpass Western peers’ IT and business services capabilities.

This is not to imply that Western firms must more rampantly or haphazardly rush into cloud computing.  Rather it highlights (yet another) dimension of business where Asia Pac countries and firms are becoming much more aggressive against their Western-based competition and against which that competition must formulate and execute a response.

For more on Cloud computing, visit equaterra.com/cloud or the KPMG Shared Services and Outsourcing Institute Cloud Computing topic page.

Filed under: Cloud Computing, Information Technology (IT), Market Trends and News by EquaTerra
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