What’s the Difference Between a Shared Service Center and a Center of Excellence?
The complexity of managing global operations has led to the emergence of specialized structures such as Shared Service Centers (SSCs) and Centers of Excellence (CoEs). The terms are sometimes used interchangeably, but each serves a unique purpose.
This article explores the key distinctions between them, the risks of using the terms interchangeably, and how intercompany accounting software supports both structures.
What is a Shared Service Center?
A Shared Service Center is a centralized unit that handles specific business processes or functions for multiple legal entities within an organization. The primary goal of an SSC is to streamline operations by consolidating repetitive, transactional activities. This reduces redundancies (i.e., eliminates duplicated processes) and lowers operational costs through resource optimization.
The first SSCs emerged in the U.S. in the 1980s and were implemented by companies including General Electric and Baxter Healthcare. In the 1990s, the concept expanded to Europe via companies such as Intel, and, later that decade, it was introduced in Asia and South America. According to Deloitte, more than 80% of Fortune 500 companies have now implemented some type of SSC in their U.S. operations.
In a multinational corporation, an SSC might handle common financial accounting processes, such as accounts receivable, for all its global subsidiaries — or it may handle the entities within a given region. This ensures compliance with local regulations while harnessing centralized expertise and technology, such as intercompany software.
Why Do We Need Centralization of Intercompany Processes?
One area of the finance function that can benefit the most from the centralization of processes is intercompany accounting. Beyond the cost reduction and efficiency gains, centralizing intercompany services helps to overcome some typical obstacles that multinationals face.
There’s a great deal of fragmentation in intercompany accounting. Various entities can have different Enterprise Resource Planning (ERP) systems, policies, and procedures. Add to those the varying compliance requirements across regions, and it’s a complicated, disjointed mess.
While the regulatory aspect will always be complex, centralizing IC processes offers companies more control over the areas they administer.
Also note that, while an SSC does centralize processes, it isn’t typically set up as a central business function. In many cases, it operates as an internal customer-service entity, charging other parts of the organization for the delivery of solutions according to SLAs.
SSCs Vs. Outsourcing
Of course, while both SSCs and outsourcing aim to reduce costs, SSCs eliminate the need to pay profit margins to external parties. And since SSCs are owned and operated by the parent organization, they provide more control over processes, quality, and outcomes — and ensure adherence to internal standards and practices.
To summarize, an SSC is operational and tactical with the aim of handling high volumes of transactions efficiently. A Centre of Excellence, however, is about the bigger picture.
What is a Centre of Excellence?
A Centre of Excellence (CoE) extends beyond the centralization of routine processes. It represents a more strategic initiative that is focused on driving excellence, innovation, and continuous improvement within its domain.
A CoE establishes and enforces policies and standards that govern the processes it oversees, ensuring alignment with company objectives and regulatory requirements. It consists of experts who provide thought leadership, training, and support to enhance capabilities across the organization.
CoEs sometimes supply services to external organizations as well. For example, one paper discusses how Bank of America worked with Infosys’s Testing Center of Excellence to improve their service delivery. They were using disparate IT systems, which made it difficult to scale up their existing services and offer new ones. The CoE helped address this issue over the course of three years.
To be effective, a CoE must have the authority to implement changes and the tools to monitor, measure, and improve performance continuously.
The Risks of Using the Terms Interchangeably
For maximum benefit, SSCs and CoEs should be clearly defined from the outset. However, their objectives and functions are not always well established, which creates several risks.
Role Ambiguity and Accountability Issues
Consider a CoE that performs repeatable processes; in this case, it’s entering SSC territory, which can lead to role ambiguity and confusion about the unit’s objectives.
Employees in SSCs and CoEs have distinct skillsets and aspirations, so this ambiguity can have a detrimental effect on engagement and retention. And, of course, clear delineation of roles and responsibilities is crucial for accountability.
Misallocated Resources
Misunderstanding the functions can result in resources being allocated to activities that fail to align with the intended purpose of either an SSC or a CoE, leading to wasted effort and financial resources.
Goal Misalignment and Inaccurate Performance Evaluations
Using the two terms interchangeably can blur the strategic focus, leading to conflicting objectives and weakened initiatives. Also, the success metrics for SSCs (e.g., cost savings and efficiency) differ from those for CoEs (e.g., innovation and quality improvement). Misalignment in defining these centers can result in inappropriate performance evaluations.
Expectation Management
Internal and external stakeholders may have different expectations from SSCs and CoEs. Confusing the two can lead to unmet expectations, dissatisfaction, and a lack of trust in the organization’s management.
How Does Intercompany Accounting Software Support SSCs and CoEs?
IC accounting software plays a critical role in the success of SSCs and CoEs. For SSCs, software such as Virtual Trader streamlines processes by centralizing and automating routine tasks associated with IC transactions, including intercompany reconciliation, IC settlement, and operational transfer pricing. It also aggregates data from multiple ERP systems, enabling centralization — no matter how fragmented a company’s financial data may be. What’s more, it provides a single view of intercompany activity, making it easier to monitor and control processes.
The resulting efficiencies and cost savings enable SSCs to handle increased transaction volumes and maintain consistent, high-quality service delivery.
For CoEs, the software acts as a centralized repository, not only for intercompany data but also for the rules governing the process — facilitating knowledge-sharing and collaboration across the organization. Its advanced reporting capabilities support strategic planning while its flexibility allows for quick adaptation to new regulations and business needs.
Conclusion
While Shared Service Centers and Centers of Excellence both aim to enhance operational efficiency and performance, they do so in different ways.
SSCs are tactical and operational, centralizing and streamlining intercompany processes to achieve cost efficiency and consistent service delivery. CoEs, however, take a strategic approach, driving policy development, governance, and continuous improvement.
Both SSCs and CoEs play crucial roles in the context of IC accounting. An SSC can handle day-to-day transactional activities, ensuring accuracy and efficiency, whereas a CoE can oversee the development of accounting policies, compliance frameworks, and innovative practices.
To learn more about how Virtual Trader can automate the entire process of managing intercompany transactions — or to request a demo — contact us today.
