Shared Services

From our experience and research there are a number of key elements that need to be in place to ensure that Shared Services is living up to its expectations and providing the results required.

Goals must be clearly defined

The most commonly cited reasons for implementing Shared Services is reducing costs and some early adopters were claiming 30% - 40% reductions. In recent studies however, respondents rated improvements in service quality as equal to cost reduction in the top 10 reasons for setting up Shared Services. Additional reasons cited were standardization of business process and optimization of working capital.

Other reasons included enabling business units to focus their efforts on core business activities and letting Shred Services deal with service related non-core activities and also to make it easier to restructure the business because of mergers and acquisitions.

When establishing cost reduction goals it is important to recognize that the returns will be impacted by organizational size, the extent of consolidation, standardization, reengineering and the application of technology. Dramatic decreases in cost will be a function of all these factors. Some Consultants assert that Shared Services is only worthwhile in organizations with a turnover greater than $ 500m. I do believe that Shared Services can be cost effective in much smaller organizations, but realistic financial goals must be established. The leverage from economies of scale and the impact of best practice processes and technological applications is directly proportional to the size of the enterprise. In smaller organizations the leverage is not as great and the resulting savings will be a smaller percentage of total service costs.

Shared Service needs to move beyond centralization

When an organization first implements Shared Services it can look like traditional centralization. Services that have been managed at a local level, will now be managed at a Corporate level, for instance. In the past this has meant reductions in service levels, leading to resentment on the part of line managers. Shared Services must quickly move beyond the simple consolidation of resources and reporting relationships or it will ultimately fail. Service Levels to clients must be improved immediately, and the client service needs must be recognized and met. This is difficult, since during the transition period to Shared Services, standards typically go down.

Some differences between Shared Services and centralized functions.

The Governance must be differentiated from the service delivery

In a centralized Corporate staff functions have always been faced with 2 sets of responsibilities. Firstly, the development of functional policies and standards and secondly, ensuring compliance with these whilst delivering the service to customers. This duality of roles creates conflict within the function, and frustrates line management clients who accuse the managers of being “corporate cops” and anything but service oriented suppliers. They also establish HR policies, and control organizational behaviour through delivery of their services.

In a Shared Services model, the staff functions must clearly differentiate the role they carry out on behalf of the Executive and the Board from delivery of services to customers. Assume for example that all services were outsourced. The Corporation would set the policies and rules and appoint someone internally to be accountable for third party’s compliance (usually a Service Delivery Manager). The External service provider would then deliver services to the organization that are within the rules defined by their client. This is how Shared Services groups need to operate.

Service Levels Agreements, Service Catalogues and Service Agreements define the service relationship between supplier and customer, what service are delivered, under what conditions and for what price. A surprising number of Shared Services organizations operate with no formal agreements with internal customers, even though clearly defined and simple Service Level Agreements are considered a key factor for Shared Services.

Service Level Agreements, Service Catalogues and Service Agreements help to minimize misunderstandings and ensure a solid footing for ongoing solid business/customer relationships. The SLA is negotiated between service providers and the customers.

Governance functions, which include policy development and compliance monitoring, are carried out on behalf of the Executive or stakeholder group. In many cases Service Level Agreements and Service Catalogues define that the services to be provided must be consistent with Governance direction or within the established rules of the organization.

Shared Services must be led from the top

Shared Services is not a bottom-up strategy. It must be driven from the top of the organization, and requires executives to embrace enterprise-wide thinking as distinct from a focus on business unit or functional focus. Many business unit leaders have

established strong functional groups within their organizations to provide high quality responsive services that are highly valued by the business unit. The consolidation of services requires these leaders to relinquish their autonomy and resources for the greater

good of the whole organizational entity.

Inevitably, this usually generates a great deal of resistance at first, as the business units fear a reduction in services and service quality due to the loss of control and owned resources. It is extremely important that the leaders of the business units understand and

accept the move to shared services and are visible and vocal in their support. In case studies of less than successful implementations, one of the key variables was those business unit executives were never on board with the strategy.

Strong leadership is essential in addressing and overcoming employee resistance. There will be many crises along the road to implementation and strong committed leadership is required to maintain the focus and the pursuit of success.

Recovering fully loaded costs is fundamental to success

There is no limit to the demand for free services. This applies to the services of internal service function  just as much as any other service relationship. To develop a positive business relationship between shared services and its customers, service costs must be

clearly understand. Pros and cons of alternative billing strategies.

Pricing services and charging customers for services provided is a fundamental tool for establishing business-oriented shared services functions. There must be a direct relationship between services consumed and costs recovered. Whilst direct charging is

the preferred strategy for activating this relationship, there are many organizations who are opposed to the internal transfer of funds and internal charging processes. Even without the actual transfer of funds through invoicing there must be a clear visible way to

have customers jointly accountable for the cost of services they consume. This can occur through joint budgeting and joint budget approval and high visibility of service costs. The calculation of service costs is the basis for any direct or indirect charging or joint

budgeting of service costs.

Summary

More and more organizations are studying the feasibility of the Shared Services model. It is important to recognize the scope of alternative approaches and to factor in all the variables that will contribute to success. A full scale feasibility study is highly recommended not only as a vehicle for quantifying costs and benefits but as a way of involving internal service groups, customers and stakeholders is determining whether some sort of Shared Services is right for them.