PRESERVING YOUR CAPITAL& ENHANCING YOUR WEALTH

w w w . l y n e a r w e a l t h . c o m

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By Isankya Kodithuwakku

Hirdaramani Group Has joined otHer diversified sri Lankan companies tHat Have set up sHared services operations. But ratHer tHan runninG tHe operation aLonGside Headquarter functions, it Has spun off sHared services to a separate Group firm, H-connect.

Incorporating the back office

In the outsourcing industry, the term “your mess for less” refers to the lower cost of con-tracting out support services. Firms are finding the term is as useful to describe the impact of outsourcing central-ized 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 headquar-ters (HQ).

chief executive of H-connect dilush perera has been involved with the shared services operation since its pilot project in 2012

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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 diver-sified firms like JKH – have begun to set up shared services units. However, worldwide, shared services spanning businesses are being progressively un-plugged 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 adapt-ing this strategy, setting up shared ser-vices 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, consoli-

dating accounts payable seven months later, now manages over 90% of the Group’s Apparel sector’s finance trans-action 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 para-

mount. However, instead of running shared services alongside more impor-tant headquarter functions, Hirdara-mani 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 addi-tion,” 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 compli-ance 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 pay-able, but expects to automate collection too. A first necessity was a document management system (DMS). Because purchasing one was costly – the com-pany 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.

shared services

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.

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“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 Hirda-ramani 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 pro-cesses, transferring accounts payable, receivable and bank reconciliation. The transition involved finance, stores, administration, human resources, mer-chandising and export departments.

When a company’s operations are distributed, it is difficult to see things as a whole. But a document manage-ment 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 facto-ries had been buying from the same suppliers on different terms. Central-izing this function enabled the group to find the best rate given and negotiate it for all the companies.

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 satis-faction 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 exter-nal customers, the shared services unit provided an efficient follow-up mecha-nism and quicker turnaround.

Hirdaramani first toyed with the idea of a finance and accounting shared services unit in 2000. However, accord-ing to the SLASSCOM case study, the group’s directors decided to decentral-ize 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 peo-ple. 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 insecuri-ties 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 cur-rently 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 out-sourced 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 docu-ment management system generates reports, highlighting areas that require attention and pending tasks. It high-lights weaknesses in processes too.

At the end of the first year, cus-tomer 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 passen-gers and sailors on ships docking in Colombo harbour. The shop eventually expanded into garment manufactur-ing 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 island-wide, 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 Colom-bo or set up factories outside Colombo. We went with the second option. Even for the BPO industry, there’s a lot of tal-ent 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.