What is Shared Services?
"Shared services" is the now well-established principle of consolidating "non-core" (back office) support services, and delivering these from centralized locations to provide lower costs, higher quality/reliability, standardization and harmonization of processes, and a flexible services delivery platform from which to leverage growth or manage business constriction.
While the name may vary from "shared services" to "business services" to "support services", what is consistent is the fact that, in a best practice scenario, the head of shared services reports either direct or indirect to the executive board, and runs a stand-alone unit the core expertise of which is firmly rooted in the organization's "non-core" services. Funding and resourcing of the service is shared and the SSO department effectively becomes an internal service provider, often times competing with external third-party providers (business process outsourcing/BPO providers).
The shared services model took of initially in U.S. companies, which recognized that it made sense to consolidate duplicate support services that were otherwise strewn across nationwide operations. The Anglo-Saxon business environment was quick to adopt shared services. There was, initially at least, slower uptake in continental Europe, as a result of in-country labor restrictions and a tendency towards protectionist management styles, although Central and Eastern Europe has since witnessed a boom in expansion, driven by organizations keen to take advantage of lower labor costs. In the growth markets of Latin America and Asia, they were quickly leveraged to provide the kind of resource flexibility needed in expanding markets.
Once an organization has decided that shared service center is worth pursuing, there are a couple of decisions that need to be made:
1. How to choose a Shared Services model?
Support services generally fall into human resources, finance and accounting, and IT. This is, of course, a simplified definition. In reality, non-core services include real estate management, legal support, fleet management, and so on.
The biggest early gains ("low hanging fruit") have been found within the finance and accounting function, and this sector, which is fairly transactional in nature, remains the largest market for shared services. There is an increasing trend for companies to focus on the procurement process, and globally we are seeing a lot of activity in applying a new approach to this area. The focus is further being extended to "procure-to-pay", which supports the recognition that the biggest gains will be reaped as a result of more holistic policies, cutting across silos.
Human resources, while facing unique requirements in-country, can still support a global enterprise platform, and much of the self-service, automated technologies that has emerged over the past decades have worked hugely in favor of HR shared services (HRSS).
Listen to Rob Bradford from Akzo Nobel, who shares that "we wanted to create cross-functional centers. So we said we're not going to functionally align so we're not going to have an HR SSC and a finance SSC. We're going to be end to end. And so with that comes a whole lot of other requests and accountabilities. So you've got to make sure that the functional leads in the company understand that and that they can share accountability across these end-to-end." And once the enterprise was set, it was set for success.
Information Technology tends to be so amorphous within an enterprise, that it's hard to pin it down as a "support" function, supporting, as it does, marketing, sales, manufacture, etc. However, IT very clearly lends itself to a shared services model and today it represents the third largest segment in this market.
2. In-country or offshore?
Once a model is chosen, the next decision is whether to run it "in-country", ie providing services for that country specifically; whether to run it regionally, i.e. covering a number of countries in that region; or whether to develop a global center (the term "captive" indicates a shared services that is located "offshore"–i.e., away from the relevant company’s home market, but owned by that company; though, given the global operations of most organizations today, these terms become somewhat meaningless). The decision as to where to base a shared services center (SSC) tends to be driven by in-house policies and strategic priorities (not least of all, turf wars). We tend to see in-country services in some continental European countries; regional services, for example, based in Eastern Europe or Asia, for broader geographies; and global services in the case of companies whose boards take a more holistic view to enterprise operations.
While in the early years Ireland and Spain were favorite locations for basing SSCs, due to wage and other cost arbitrage opportunities, today, Asian markets have opened up, and we are seeing more captive centers located in those regions.
3. In-sourced or outsourced?
In shared services speak, "in-sourcing" simply refers to the delivery of services from in-house shared services operations (SSOs). These can be in-country, regional, or global, but are all captive centers (though captive tends to refer to offshore, albeit owned, operations). Today, we often hear the term "smart sourcing", which refers to a more ideal balance between in-sourcing and outsourcing.
There are a number of providers that have specialized in business process outsourcing services within finance, HR, and other functions. These providers will be happy to take your entire process (or as much of it is you are comfortable handing over) and provide these services back to you at a lower cost – based on cost per transaction or other standard measure (eg, Full Time Employees). The point here is that outsourced providers make your "non-core" business, their "core" business, and therefore develop expertise in that area. That, and the fact that by supplying multiple customers with the same processes, providers can leverage significant resource and process synergies that can be passed on to you, the customer, make outsourcing attractive.
An additional point is that, while it may not make a good business case for you to invest in amazing supporting technology for your in-house shared services, an outsource provider’s business depends on them investing in the latest and greatest enabling technology. Outsourcing, therefore, gives you access to that technology, to the process expertise, and, increasingly, to the data analytics capability that these providers are amassing. These tend to be the most important drivers when evaluating outsourcing. Data gives business leaders a unique opportunity to optimizes their performance and improves their services delivery.
"It's important to understand how well your processes are running and you can look at the data for that ..."
Barbara Hodge, Principal Analyst & Global Digital Content Editor, SSON
The trend today is to speak less of "outsourced providers" and more of "strategic partners". With lines between the business and its suppliers blurring, strategic partnership can, in many cases, deliver above average results by extending process scope (end-to-end, or e2e, as it is referred to), collaborating on problems, sharing risk/reward (skin in the game) and coming up with more creative solutions.
Numbers that matter: Measuring digital performance in shared services back-office functions
by Gautam Saha, Sourcing Advisory at ISG
Most SSOs have taken initial steps to explore robotic process automation (RPA) and other digital automation tools for various functions in finance, procurement, customer service and human resources. Emerging technologies promise to drive better productivity and efficiencies for many back-office functions and SSOs are smart to take advantage. But the organizations that will make the most of these initiatives will be the ones that first develop a framework to measure the specific efficiency and productivity gains for which they are hoping.
To measure the success of a digital initiative, an organization must baseline its internal processes at the beginning of the digital journey. Measures to consider are two dimensional:
- improvement in volume productivity and
- improvement in cost productivity across the business functions being digitized.
Let’s look at accounts payable (AP) as an example. The following baselines are required before the start of the digital initiative:
- Volume productivity - total number of invoices processed per full-time equivalent (FTE) per month
- Cost productivity - cost to process per invoice.
The availability of cost data can impede some organizations. Ideally, the cost data should include all expenses related to people, facilities, overhead, IT and systems. However, many organizations may not have detailed cost allocations per finance function, in which case they should develop a baseline with people costs (including salary and benefits) associated with the AP function.
The table below shows the recommended volume and cost measures for various back-office functions.
Once an organization has established these baselines it must commit to an annual regimen to determine the actual impact to the productivity metrics. Organizations should create a framework to define the variables that impact productivity in their environment, so they build a consistent year-on-year measurement.
Improvements in volume and cost productivity across an organization will vary based on the maturity of its RPA implementations, ERP system, use of bolt-on tools and use of cloud-based technologies, among other things.
The graph below shows the range of volume productivity shared services centers can achieve depending on the maturity of their operations. Each of the functions listed in the chart above is represented along the x axis. The baseline for productivity in this case is set to 100 at the outset of the digital initiatives. The light blue bars represent productivity volume for new SSCs, and dark blue bars indicate productivity volume for mature SSCs.
The delta between productivity measures for new SSCs and mature ones indicate productivity improvements that provide an attractive return on investment for the digital initiatives.
"The industry best-in-class numbers of a year ago are now outdated due to the efficiencies driven by RPA and other digital technologies."
The chart below demonstrates the transaction price improvements organizations can expect to achieve over a three-year period. For example, if the cost to process each invoice for accounts payable is 100 at the beginning of the digital journey, it should reduce by 30-38 percent depending on the maturity of the SSO.
Digital initiatives can drive significant benefits in back-office functions of shared services organizations. Recent ISG benchmarks of SSCs that have implemented RPA on a large-scale show these organizations outpacing what was previously deemed “best in class.” In fact, the industry best-in-class numbers of a year ago are now outdated due to the efficiencies driven by RPA and other digital technologies. RPA and artificial intelligence (AI) are quickly leveling the playing field for best in class. While the largest SSCs were once able to drive a lower cost per transaction due to economies of scale, SSCs with true RPA/AI centers of excellence (COE) have built scale in the automation team to even out the playing field, leading to the transformational impacts on productivity and costs referred to earlier.