In the Gulf Cooperation Council (GCC) region, mid-market capitalization investors have a unique opportunity to acquire or establish Shared Service Centers for their portfolio companies. This would provide scale for operational improvements and generate additional value through monetization opportunities.
This strategic business approach can function as an “integration engine” to support an “acquire and exploit” strategy, as well as a potential exit strategy.
Despite highly favorable business cases developed in the UK and U.S. for investors, its realization was hindered by specific regulatory frameworks that mandated strict segregation of duties between the fund and the operating companies.
However, in the GCC region, regulatory barriers are far less onerous, rendering this well-established and financially proven thesis ready for execution.
A Tailed Wind Environment
The current high valuations in the market, coupled with challenges in accurately pricing deals and intensified competition due to an excess of capital, are making the setup and optimization of shared services increasingly relevant. This approach offers a proven way to lower operating costs and enhance quality.
In the post-COVID landscape, the main priorities for investors and Chief Executive Officers (CEOs) of portfolio companies are providing unprecedented tailwinds for shared service capabilities as it allows for:
- Accelerating the transformation towards more flexible cost structures and predictable cash flows.
- Reducing or eliminating human capital-intensive tasks.
- Enabling a focused approach on growth plans and core differentiating activities, without being constrained by the demands of back-office operations.
- A “tested and proven” model for both investors and portfolio companies.
The concept of shared service centers, driven by the goal of reducing operational costs through economies of scale, scope, and skills, and more cost-effective locations, was first introduced in the late 1980s. Over the years, organizations have continued to evolve their service offerings to meet the growing sophistication of consumer demands. This evolution has been essential to maintaining a competitive market position and fostering a customer-centric culture.
Today, customers are even more demanding, expecting 24/7 access and immediate issue resolutions through their preferred communication channels, or even channel-hopping.
These challenges complement the long list of expectations from investors, which includes stringent governance and reporting requirements, as well as a growing demand for increased scrutiny and transparency. Consequently, management finds itself pulled in multiple directions, attempting to meet all these demands while their teams may lack the necessary skills.
Shared Service Centers can play a crucial role in addressing these challenges. They have transformed from tactical, low-cost operations into key business differentiators, positioned at the intersection of investor requirements and the financial performance of portfolio companies.
Why Sovereign Wealth Funds, Private Equity, and Family Offices Portfolio Companies Are Underrepresented in the Adoption of the Shared Service Center Model?
There are several fundamental barriers preventing broader adoption:
- Scale: In the mid-market capitalization, portfolio companies are more than often subscale to justify the business case for a Shared Service Center. Although the adoption of new technologies has largely decreased, the minimum entry point requirements the investment requires can remain too high for an in-house capability.
- Retaining control and contract commitment: If establishing an “in-house” Shared Service Center is not feasible, another option is to engage an existing third-party provider (Business Process Outsourcer (BPO)). However, this approach comes with challenges, including non-negotiable 5-year contracts, additional costs for oversight, and the need for renegotiation or rewriting of agreements whenever portfolio companies wish to change or add service level agreement/key performance indices (SLAs/KPIs), reduce staff, or request innovations. BPOs often lack the flexibility and agility required by these companies.
- Execution risks: Transitioning services to a shared service model requires a specific skill set typically not found within the portfolio company. It becomes an unpalatable risk as well as a distraction for companies that are focused on their value creation plans and core market differentiation. Concerns include potential performance decreases during transitions, impact on staff morale if this is coupled with lay-offs, and a lack of bandwidth from management.
The Unique GCC Opportunity
Aware of these limitations and yet determined to leverage the benefits of Shared Centers, investors in the U.S. and UK explored the possibility of building or buying a “utility.”
In this business model, the shared services would primarily cater to the investor’s companies to provide them with scale for operational improvement while retaining these benefits and creating additional value. This will be achieved by setting up a “utility” entity with its own profit & loss (P&L) and exit value, and potential for expansion to companies beyond the investor's portfolio. In essence, the best of both worlds by combining the domain expertise and process knowledge of the BPO while retaining the intimacy and flexibility of “in-house” shared services as well as the optionality for the investor to monetize their investment.
Despite a compelling business case, U.S. and UK regulations require a strict segregation of duties between “the fund” and the operating companies. This regulatory environment makes executing this creative thesis virtually impossible, as even encouraging or influencing an operational decision could be viewed as a breach of the code of conduct.
However, in the Middle East, there are lighter regulations. Therefore, we see a unique opportunity to drive valuation by creating an “integration engine” to support an “acquire & exploit” and potential exit strategy.
The GCC presents a “win-win” opportunity for both investors and portfolio companies:
- Increased efficiencies and effectiveness and project “bankable” earnings before interest, taxes, depreciation, and amortization (EBITDA) improvements.
- Ensure consistent financial reporting and have direct access to data for ad hoc analysis.
- Professionalize, standardize, and benchmark portfolio companies for shared service expenses.
- Invest in technologies that will further increase quality and reduce costs, a challenge often faced at the portfolio level.
- Explore monetization options, including offering shared services beyond portfolio companies or pursuing an exit strategy.
For Portfolio Companies:
- Separate front-office core competencies from back-office delivery.
- Consolidate, standardize, and professionalize operations, HR, IT, finance, and customer service functions.
- Generate higher profitability from future growth and earlier EBITDA impact (this could be further enhanced by using offshore models)
- Increase valuation by establishing an “integration engine” to support an “acquire & exploit” and potential exit strategy.
- Access a pool of talent, in a world where people are the prime currency.
At Ankura we have the expertise, experience, and methods to support you in developing and implementing your shared service strategy.
© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.