Arthur Andersen Report

Shared Services Business Case

SECTION 1: SHARED SERVICES RECOMMENDATIONS

Most successful organizations view creation of a strategy as an integral part of success. Strategy development begins by identifying the organization's mission and defining strategic objectives that will enable the organization to achieve its mission. The success of an SSC at SIU is dependent on the development and execution of an effective strategy. It is expected that the service levels under the SSC would exceed those that are currently provided by the separate P&D functions from both a cost and quality perspective.

A proposed mission statement for the SSC may include the following:

• To exceed university-wide customer and vendor expectations by procuring and paying for high quality goods and services at the best possible price within established Federal, State, and University guidelines.

The following objectives, which should be considered for the SSC, were identified from (a) reviewing proven business practices of both commercial and university purchasing and disbursements functions, (b) reviewing current practices at SIU, and (c) surveying current users of SIU P&D services to identify their needs.

• Developing professional employees with the knowledge and skills to be responsive to the needs of departments and vendors
• Developing strategic business alliances with vendors and involving them in the development of new ways to process disbursements
• Decreasing overall P&D costs for SIU over time
• Consolidating the purchasing power of the SIUC and SIUE campuses in order to negotiate better pricing arrangements with preferred and other vendors
• Using leading edge technology to make the SSC accessible to the SIU community
• Anticipating and exceeding the service expectations of vendors and the SIU community
• Using consistent policies and procedures in order to decrease processing time and errors
• Devoting time to training campus departments on the policies and procedures of the SSC in order to educate them about the P&D processes
• Coordinating payment schedules with cash needs in order to maintain optimal cash flow
• Continually monitoring and reporting progress against established goals and objectives

The P&D departments at each campus currently do not have established mission statements to help identify priorities and guide daily tasks. As a result, these departments tend to focus more on the day-to-day operational responsibilities of the P&D functions than on long-term quality, service, and cost objectives. Concentrating on daily activities makes the P&D departments appear to react to department and vendor needs rather than proactively determine ways to better serve them. By developing a mission statement and objectives that will enable the SSC to fulfill this mission, the employees of the SSC will be better able to focus on value-added activities.

In most instances, the P&D process begins with the creation of a requisition by the university department ordering goods or services. Once approved by the initiating department, the requisition is accessed electronically the Purchasing department where a purchase order is created and sent to the vendor. The vendor then ships the goods and a bill to the university where goods are noted in the system upon receipt. Once the bill is received by the Disbursements department, an invoice voucher is created and a check is processed to pay the bill.

As illustrated in the diagram below, the P&D process can be perceived as five components, each of which combines SIU resources with proven business practices in order to establish a value-added and customer-driven process. A detailed process flow and a corresponding description of these components are included as Attachment 1.

In order to determine whether or not the current P&D functions are meeting the needs of the departments and vendors, a survey was distributed to high volume departmental users and certain vendors at each campus. The results of this and future surveys will provide SIU with information that can be combined with other data to help track the level of service delivered over time.

Nineteen departments that are high volume users, in terms of both dollars and volume of goods purchased, were selected for the survey. Twelve vendors, representing a cross-section of vendor types (large, small, frequent, and sporadic), were also selected. Although the survey distribution was not intended to be a representation of all customers affected by the SIU P&D processes, the participating departments and vendors provided varying insights and responses as to their satisfaction with existing processes. The listing of departments and vendors that received the surveys is contained in Attachment 2.

The survey suggests that while the departments are generally satisfied with the overall level of service they receive, the P&D departments have room for improvement. Findings from the survey that support the recommendation of a customer-focused SSC include:

• 70% of respondents indicated that rapid processing of requisitions is the most important service of the Purchasing department.
• More than 50% of the respondents expressed doubts about the Purchasing department's ability to obtain goods and services for a better price than the respondent could achieve through departmental efforts.
• Over 90% of the departments that completed the survey contact Purchasing most often by telephone or campus mail. Over 75% of vendors that completed the survey contact Disbursements most often by telephone or mail.
• Many of the departments lack an understanding of the basic P&D policies and procedures.

In addition to the user surveys, we conducted interviews with significant end users as defined by the Chancellors and the Dean of the SOM. Based on these interviews, we identified critical functional requirements from the campus community perspective. Our recommendation incorporates these standards as part of our implementation strategy. The requirements include:

• The role of purchasing should be to process requisitions and ensure that all compliance matters are appropriately addressed. The responsibility for creating detailed product specifications should rest with the initiating department.
• The SSC should provide personal attention regarding exceptions to the typical P&D process. The departments noted that they will occasionally require assistance in expediting certain purchases, resolving vendor conflicts, or developing specifications for unfamiliar products.
• The SSC will need to coordinate its operations with the rollout of the Oracle system. For example, not all users will be electronically linked with the purchasing department when the system is converted. As a result, departments not linked electronically to the purchasing department will continue to utilize paper requisition forms. Several other parts of the process will also remain paper-based, including payments to banks, requisitions from some low-volume departments, and non-purchase order transactions.

  1. Key Operational Improvements

Operational improvements account for a significant portion of the efficiencies expected from the implementation of an SSC. Some of these improvements are dependent on the Oracle system and some are the result of improved business practices. For example, streamlining processes, eliminating duplicative and non-value added activities, and increasing focus on specific process improvements such as the implementation of a comprehensive preferred vendor program, will reduce the number of employees required to operate the University's P&D function. These operational changes result from the following improvements:

a. Process Improvements

• Improved economies of scale within the SSC will reduce the need for multiple Buyers, Account Technicians, and support staff to work directly with the same vendors. The scale of the operation also facilitates standardization of processes and eliminates the need for supervisors at each campus location.
• Successful implementation of the Oracle financial system will facilitate the flow of information between the user community and the P&D function. The new system is expected to help improve transaction processing efficiency, reduce or eliminate processing redundancies, decrease paperwork, and reduce errors.
• Implementation of a comprehensive preferred vendor program should result in significant cost savings for the University, increased levels of vendor service, and fewer vendors. Reducing the number of vendors eases the administrative burden associated with processing purchase orders, invoice vouchers, and checks for the thousands of vendors that currently serve SIU.
• Use of performance measures will provide quantitative measurements of the P&D function, enabling management and staff to better assess performance.
• Creating comprehensive campus-wide training programs focused on the procurement and disbursement processes will increase the general knowledge of the campus community about appropriate P&D procedures, which should help reduce the administrative burden related to error processing.

b. Purchasing Improvements

• Completing the implementation of the procurement card is expected to facilitate the purchase of small dollar items for the campus community, while reducing the administrative burden associated with processing c-numbers, invoice vouchers, and checks.
• Reducing the number of existing approval requirements will speed the routing of purchase requests and reduce the number of administrative errors.
• Increasing focus on the terms and conditions that the University procures goods and services should improve the level of service provided by vendors as well as reduce the cost of those items, even if the purchases are not part of the preferred vendor initiative.

c. Disbursements Improvements

• Allowing campus users to authorize certain low cost payments should reduce the amount of time P&D personnel spend processing small dollar items without sacrificing significant internal control.
• Reducing the number of check cycles, automating the check issuing process, and consolidating payments made to individual vendors should reduce the number of checks issued as well as the amount of time approving, sorting, and mailing checks.
• Increasing the use of electronic transactions shortens cycle times, reduces the likelihood of administrative errors, and reduces administrative burden.

2. Performance Goals

Implementation of Oracle and the process changes described above should allow the SSC to systematically monitor its performance. The process of performance management at the SSC should balance measures of cost, quality and time. The focus of the measures should be on output and process efficiency. The following metrics are samples which may be used to assess the performance of both employees and the SSC as a whole. They are not designed to serve as stand-alone indicators of the overall performance of the SSC or its employees. The measures should be viewed collectively as one component of performance assessment.

a. Measures of Cost

The following measures are designed to serve as indicators of the SSC's costs over time. These measures should be interpreted to suggest cost inefficiencies that might be addressed through automation or expenditure reductions.

• Labor cost and total cost per purchase order
• Labor cost and total cost per invoice processed
• Labor cost and total cost per payment

b. Measures of Quality and Time

These indicators of quality and time are designed to assess the efficiency of employees and systems within the SSC. They will also serve as indicators of areas for future process flow improvements.

• Number of purchase orders processed per Buyer
• Number of invoices processed per Account Technician
• Percentage of goods provided by preferred vendors
• Number of required approvals per requisition
• Voucher processing error rate
• Percentage of vendors using EDI, summary invoicing, or invoiceless processing
• Average time to resolve errors and inquiries
• Average time from requisition to payment

3. Organizational Alignment

The P&D departments at SIU are currently organized in a manner that does not focus on maximizing efficiency and reducing administrative cost. The current purchasing and disbursements reporting structure is outlined below:

The reporting structure for the P&D departments varies across the campuses. At SIUC, the Director of Purchasing reports to the Associate Vice Chancellor for Administration, while the Director of Disbursements reports to the Comptroller. At SIUE and the SOM, the P&D functions both report to the Director of Financial Affairs and the Executive Director of Finance and Administration, respectively.

In order to optimize performance within the SSC and ensure that P&D is viewed as one continuous process, the following organizational structure is recommended:

The proposed design of the SSC is simple and efficient. It maximizes administrative span of control, minimizes the number of management layers, facilitates a coordinated P&D function, and capitalizes on the process benefits inherent to the investment in Oracle.

The Oversight and Advisory Board would have primary responsibility for managing the SSC operation on behalf of the University. The O&A Board would monitor the performance of the SSC, resolve potential conflicts that may occur between campuses, and continue to drive the implementation of improved administrative processes. The O&A Board would likely include the Vice Chancellors for Administration from the SIUC and SIUE campuses and users from each campus community. Members of the O&A Board would be accountable through the regular campus chain of command.

The roles and responsibilities of other personnel within the SSC are outlined in the Job Responsibilities section.

C. Human Resources

The creation of an SSC will clearly impact individuals currently involved in the P&D function on each campus. However, we expect that the long-term benefits of creating an SSC will outweigh short term disruptions and anxiety that will result from combining the individual P&D processes. Should P&D personnel be one location, this would allow for better sharing of information and resources across the University. There is currently a degree of coordination among P&D personnel at the SIUC and SIUE campuses. However, the campuses do not typically coordinate with the objective of establishing standard, more efficient policies and procedures.

In order for the SSC to reduce costs and operate efficiently, it must eliminate duplication of efforts across the campuses. Currently, Buyers at both campuses place orders with the same vendors, Account Technicians disburse checks to the same vendors, and each campus maintains its own vendor list. The SSC will consolidate these efforts using fewer resources, which allows SIU to realize significant cost savings. The SSC will also take advantage of the improved efficiencies offered by Oracle in order to reduce staff time involved in non-value added activities.

1. Cost Savings Related to Staffing

One of the most significant ways for SIU to realize cost savings will be to decrease the Full Time Equivalents (FTEs) required to support the P&D process. Currently the P&D departments consist of over 63 FTEs at a cost of $1.7 million per year. Using the average salaries for each position at both the SIUC and SIUE campuses, the SSC will employ between 39 and 51 people at a cost of approximately $1.3 million per year. This could eventually result in an annual cost savings of nearly $600,000. This cost savings calculation will be more fully described in the Cost-Benefit Analysis in Section Two.

The table below compares the current FTEs by function at the three campuses to the proposed FTEs by _function at the SSC.

a) The SIUE campus has combined Administrative Accounting and Disbursements into one department. The current FTEs for Disbursements above include both the Director and Business Manager because the Director spends only a portion of his time on disbursement-related activities. The SSC will only handle the Disbursements function, so Operations, Cash Management, Reporting, and Property Control should remain on the SIUE campus.

b) The table above does not include General Stores, which is in the process of closing. During previous analyses of the procurement function, AA determined that the General Stores function unnecessarily increases administration cost, misallocates responsibility for monitoring appropriate inventory levels, and does not significantly improve the level of service provided to the campuses. General Stores is scheduled to close in Carbondale on 11/30/98 and in Edwardsville on 4/1/99.

c) The SSC staff responsible for Non-Resident Alien tax preparation, Central Receiving, Expediting, and Surplus Property functions will be located on each campus. FTEs on each campus will be responsible for all of these functions.

d) Purchasing functions will remain located on the Springfield campus for the School of Medicine.

2. Staffing Rationale

Staffing levels at the SSC should be significantly less than those in the current P&D departments. The reduction in total FTEs can be attributed to the increased efficiencies offered by Oracle and the process improvements outlined in the Key Operational Improvements section above. While creating an SSC will decrease the total FTEs dedicated to the P&D processes, it also changes the composition of employees by function. An SSC eliminates the need for multiple campus management of the P&D processes and decreases the need for support staff. The additional staff at key positions reflects the SSC's objective of providing superior customer service. For example, the increase in the number of Buyers should help facilitate the success of value-added P&D programs such as Preferred Vendors.

3. Job Responsibilities

Because of the inefficiencies in the current processes, P&D staff are focusing more on day-to-day operational responsibilities than on long-term quality, service, and cost objectives. While day-to-day responsibilities are necessary to purchase and pay for goods for the SIU community, the implementation of Oracle and the creation of the SSC should allow staff to increase focus on strategic activities.

a. Administration

There should be one Director, one Assistant Director for Purchasing, and one Assistant Director for Disbursements at the SSC. The Director should focus on strategic activities such as:

• Serving as a conduit to the University administration and the Oversight and Advisory Board
• Developing and maintaining ties to customers
• Articulating the vision for the SSC
• Understanding the business environment and communicating business information to SSC staff
• Providing SSC staff with the necessary tools, information, and resources to do their jobs

The Assistant Directors should be responsible for the supervision of the P&D process at the SSC. The responsibilities of the Assistant Directors should include:

• Supervising SSC staff
• Overseeing the Central Receiving, Expediting, and Surplus Property functions at each campus
• Ensuring that the SSC is following all Federal, State, and University guidelines

b. Purchasing

There should be between twelve and fourteen Buyers at the SSC, each focused on different classes of commodities. The responsibilities of the Buyers should include:

• Communicating SSC policies and procedures to departments
• Determining vendors that best meet the needs of customers
• Suggesting ways to improve product quality, promote better availability, or provide greater economies in purchase or application
• Helping to form strategic alliances with vendors
• Processing bids and awarding purchase orders to appropriate vendors
• Assisting with the implementation and ongoing management of the procurement card

There should be between five and ten purchasing support staff in the SSC that will support the Director, Assistant Director, and Buyers. The responsibilities of the purchasing support staff should include:

• Generating and sending purchasing reports to departments, the SSC Oversight and Advisory Board, and the Board of Trustees
• Assisting with buying, bidding, and awarding Purchase Orders
• Ensuring that bidders are qualified
• Maintaining a master vendor list
• Assisting the Director or Assistant Directors with special projects
• Assisting Disbursements staff during times of need

There should be seven employees responsible for the Central Receiving, Expediting, and Surplus Property functions for the SSC with at least one FTE at each campus. Their responsibilities should include:

• Dispatching deliveries that do not go directly to departments
• Completing Receiving Reports for deliveries
• Tagging equipment that is university or state-owned
• Working with vendors to process damage claims and incorrect shipments
• Receiving, processing, and selling surplus equipment

c. Disbursements

There should be between eleven and twelve Account Technicians at the SSC. The responsibilities of the Account Technicians should include:

• Processing vouchers for purchasing, travel, contractual and Foundation transactions
• Ensuring that payments are made correctly and within statutory guidelines
• Coordinating payments made either to or on behalf of Non-Resident Aliens
• Signing and mailing checks on behalf of the University
• Handling and distributing paper-based payroll checks
• Resolving payment errors
• Auditing procurement card transactions for the University

There should be one to three Disbursements support staff in the SSC that will support the Director, Assistant Director, and Account Technicians. The responsibilities of the support staff should include:

• Generating and sending reports to departments, the SSC Oversight and Advisory Board, and the Board of Trustees
• Assisting the Director or Assistant Directors with special projects
• Assisting Purchasing during times of need

From an internal control perspective, it is important to ensure that the personnel who purchase items remain organizationally separate from those who process payment for those items. Accordingly, we believe that separating the P&D responsibilities at the process level is a functional requirement.

d. Information Technology

There should also be one to two information technology FTEs to support the P&D users at the SSC. Responsibilities of the IT personnel would include troubleshooting system problems, conducting end-user training, developing system enhancements, and acting as a liaison between the P&D users and the IT Oracle support team.

4. Training

As part of the strategy to focus on customer service, the SSC should devote significant time to training departments on the policies and procedures of the SSC as well as training its own employees. Developing professional employees with the knowledge and skills to be responsive to the needs of departments and vendors will enhance the customer service offered by the SSC. According to the National Association of Purchasing Management, the overall education level of purchasing professionals increases from year to year. The number of professionals who complete bachelors and graduate degrees in business increases steadily, and each year a higher percentage of purchasing professionals achieve credentials such as Certified Purchasing Manager and Certified Purchasing Contract Manager.

The SSC can also enhance the skills of its employees by providing in-house opportunities for P&D personnel to expand their skills. This can include systems training, negotiating seminars, and sourcing strategy training. The SSC should encourage and provide support to personnel for joining and developing contacts with relevant purchasing or trade associations.

D. Information Technology

Information Technology (IT) is critical to the success of an SSC. Since the SSC will be remote to at least some portion of users, the technological capability to transmit information between customer departments, the SSC, vendors, and other financial functions of SIU will be extremely important. Based on our initial review of the current systems environment and our assessment of the planned Oracle implementation, we feel that the technological transition to an SSC should be relatively simple and result in minimal additional technology-related cost. This is mainly due to the decision by SIU to implement the Network Computing Architecture (NCA) version of Oracle Applications software for the financial functions at both SIU campuses. Oracle's NCA will consist of three principal components:

• A centralized set of servers and routers in a single data center, where data is stored, communications are managed and the vast majority of transactions are processed
• Web browser software on user workstations creating a thin client that minimizes the need for support, processing power and bandwidth at remote locations
• A network connecting users throughout the University system to the Oracle data center. SIU already has significant investments in both local area network (LAN) and wide area network (WAN) infrastructure.

As a result of the implementation of the Oracle system which would occur in advance of any SSC implementation, the following technology-related benefits should be realized:

• Users throughout the University will have connectivity to the Oracle System through a Web browser interface. The browser interface is designed to provide a distributed user population with access to centrally maintained systems. This will translate into reduced support and telecommunications needs. Because Web browsers are designed to run on a variety of desktop workstations (i.e., Windows 95, Windows NT, Macintosh, UNIX), this architecture will allow users throughout the University system access to Oracle.
• Users will receive significant training on the Oracle tools, resulting in increased knowledge about the capabilities of the software.
• A common toolset will be utilized by the departments on the different campuses, resulting in increased consistency between the three campuses' department practices.
• Even under NCA, printing demands a great deal of WAN resources. Under the SSC model, the need for heavy P&D printing would be concentrated to a single location, reducing the need for costly WAN circuits to a user group distributed throughout the University system.

If the SSC is implemented, the following additional technology-related benefits will also be realized:

• Most heavy users of the system will be moved to a single location. It should be easier and likely less costly to support telecommunications needs for that location. WAN connectivity between the SSC and the Oracle data center can be optimized for performance and cost. There is also an opportunity to further improve costs and performance by locating the SSC in the same building as the Oracle data center or at a location that does not require the use of a third party telecommunications provider for the WAN lines.
• Fewer IT staff and less maintenance-related costs should be required. It will be easier for IT staff to support a group of users working in a single location.
• Technological issues can be resolved in a consistent manner.
• A single data site should result in decreased access time for users and more consistent information for management to utilize in assessing the P&D performance and making P&D-related decisions.
• Ability to attain faster migration to new software releases or other technology platforms should occur.

Based on our initial review, the anticipated benefits of the Oracle system and the NCA would facilitate the transition to an SSC. Having adequate network infrastructure in place is key to the design and success. If Oracle is implemented correctly, technology should not preclude the decision to establish an SSC for P&D.

1. Key Assumptions

Our findings are based on the assumptions below.

• We used the technical architecture proposed under the current Oracle project as our starting point for the infrastructure of the SSC. SUN server hardware has been chosen as the Oracle standard, allowing for a single hardware platform to administer technical support. SIU has Information Technology personnel throughout its campus locations to maintain and administer the system and provide necessary user support.
• Servers have been properly sized to accommodate SIU's anticipated usage requirements, and that the server architecture is scaleable to meet increases in future systems demand.
• We have not tried to assess sizing estimates related to the server architecture.
• With respect to network communications, WAN lines and LAN equipment are already in place and maintained by the University. Additional circuits and service upgrades are being ordered at some locations to prepare for anticipated Oracle usage
• Given the limited time available for this project, no assessment of network infrastructure cost, reliability, quality, or performance has been made.

2. Profile of System Users

The following table describes the different types of users in the P&D functions, their anticipated usage of the Oracle system, and a distribution of users by location in the current environment compared to that in a shared services environment. Note that nearly all users will rely at least moderately on the system; therefore, it is critical that the system be reliable and efficient in order for the SSC to function effectively.

3. Oracle Infrastructure

The Oracle system utilizes the concept of network computing or NCA. Sometimes referred to as thin client architecture, NCA utilizes a web-browser as the user interface. In theory, this should be the only interface software that a user needs on their desktop to access the Oracle system. Unlike other client/server architectures, where significant processing is done on the user's desktop system, NCA pushes most of the transactional computing to the Oracle servers. Network traffic is minimized, performance is enhanced and the need for costly WAN lines is minimized. Since computing has been shifted to the servers, the physical location of the user community becomes less of a challenge to the IT organization. Please refer to Attachment 5 - Oracle Infrastructure for a pictorial description of the network computing architecture.

As noted in the table above, the P&D users are currently distributed across the university. Please refer to Attachment 3 - Current Purchasing and Disbursements Function for a graphical representation of their current location. Attachment 4 - Purchasing and Disbursements - Shared Services Center illustrates how the distribution of P&D users would change in an SSC environment. Note that the primary P&D users will be concentrated in the SSC; however, for logistical reasons, the receiving function would remain at the campus locations.

4. Implications of Shared Service Center Oracle Design

The technological impact of consolidating the P&D functions into an SSC is documented below:

• The SSC would leverage the Oracle system NCA design. As such, the Oracle client/server architecture should not have to be significantly redesigned to accommodate an SSC environment.
• The primary purchasing system users will be located in a local-area network (LAN) environment. If the SSC and the Oracle system are located within the same center, users should experience optimal system performance and more efficient processing. If the SSC and the Oracle data center are in different locations, high speed WAN circuits will be needed to provide adequate performance levels. There may be ongoing costs related to the maintenance of a WAN circuit.
• IT can manage and maintain most P&D user demands from a single location and provide a single point of system administration for the servers. Some on-site support should be anticipated for heavy system users.
• System training can be conducted more easily for users who are centrally located.
• P&D users not located within the SSC (i.e., Central Receiving/Expediting/Surplus Property, Departmental Assistants) should continue to be supported by the campus IT departments. The campus IT departments will require some training on the technologies utilized by these users.
• To better manage user expectations, a Service Level Agreement (SLA) between P&D and IT could be established as a framework for system support and administration.
• Users can share information and leverage knowledge.

Copyright © 1998, Board of Trustees, Southern Illinois University
Last updated: 07 December 1998