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Utilization of shared services is becoming increasingly tied to corporate strategy, and centers are handling more work than ever before.
by Peggy Cope
Shared services have been doing a very good job for a lot of companies. And you know what happens when you do work well? You get more of it.
“What’s happening in shared services, once people get past digging their heels in, they get embedded control, handle more data than before, and consolidate and improve processes. They have a whole lot more capability as far as providing useful data and information than they ever had in the past,” said Penny Weller, senior business advisor at .
Weller’s in a position to know. She worked in decision support in shared services at Pfizer, and when she started pushing the shared-services model 12 years ago, the resistance was fierce. As every business unit fought for its own people and systems, it was nearly impossible to pull them apart. According to Weller, the time hadn’t come yet for Pfizer, although now the pharmaceutical giant’s executives defend the possibilities of shared services’ benefits.
Once HR executives get past internal complaints and see the true value of not having all that business “stuff” to deal with, the C-suite sees the light and even realizes the benefits of having better data and processes. Said Weller, “It’s a struggle, but they are seeing the true value.”
Hackett’s current research demonstrates that shared services are among the foundational tools used by organizations to drive performance. By utilizing shared services, 65 percent of world-class firms (those in the top quartile for performance) save 20 percent or more, and nearly a third achieve savings upwards of 41 percent. In addition, in a rolling, three-year set of benchmarks contained in the “Hackett 2006 Enterprise Book of Numbers,” Hackett followed the results of 125 companies. Using efficiency and effectiveness metrics, world-class employers’ results were matched against peer companies. What Hackett found should serve as a wake-up call to organizations that have failed to act on shared services, as their competitors are leveraging not just shared services but also low-cost, offshore services. According to the research, more than 60 percent of all companies with HR shared services have achieved cost reductions of 21 to 80 percent; internal client satisfaction has improved along similar lines; world-class companies spend $1,614 per employee on HR, compared with $1,864 for the typical company; and world-class organizations employ 11.5 FTEs per 1,000 employees, compared with 13.5 FTEs for the average.
Down the road, shared services are expected to take an even larger role. And the roles they are playing go well beyond the transactional.
According to Michael Steer, managing consultant at , “It’s not just about getting a cheaper cost; executives are saying, ‘I want to know what goes into that cost.’ Transaction pricing isn’t the way to go any more.” The fact that work is being done by a third party doesn’t mean a company should be satisfied with merely knowing what it is being charged. “You don’t really know what you are paying for,” said Steer.
The ‘Steppng Stone’ Effect
In Europe, said Steer, most organizations that have started down the route of whether to outsource or pursue a captive model have tended to take a shared-services captive route, although it tends to be as a stepping stone as shared services mature. “We did a survey in 2006-07 that showed buyers saying, ‘We are happy, we have set up shared-services centers, and we are meeting or exceeding expectations.’ But then they say they will look to move some of those toward a hybrid model in the future to generate savings.”
Once a company has its own shared-services center, it has a choice of hybridization, where it will start to outsource some of the processes. The goal is to optimize the shared-services center, exploit the investment that’s been made, and consider things such as whether it can offer more services. They ask: Is there a different mix that can be achieved? Can some of what was handled by the shared-services center be given to third-party provider?
“There has been a huge knee-jerk reaction to the availability of labor arbitrage in moving to lower cost locations,” Steer noted. “Everyone rushed off to set up shared-services centers in India or the Philippines or wherever, depending on the organization’s language requirements.”
In Europe, given the language differences and varying cultures, more challenges face organziations creating shared-services centers to serve all those markets. However, said Steer, the industry is beginning to see more acceptance of outsourcing per se within Europe over the past couple of years.
“It used to be American corporations that had outsourced, but now European corporations are doing it and considering it. They are not being told to do it by HQ—they are going down that route by themselves.”
In part, this is the result of increased comfort with the concept: Companies have seen others do it, so it seems less risky. Much of Europe went captive simply because of a perceived lack of safety in the outsourced model. The “global village” bears some responsibility for newer mindsets.
Said Steer, “If your competitior happens to be American and has reduced his costs, dropped straight through to the bottom line, you are losing competitive advantage. If others are doing it, how do you keep up with them? You see less now of a pure wage arbitrage as motivation.” The question now for most organizations is whether they have the right individuals and skills in-house, and if not, should they reach out to a specialist or expert?
A global credit crunch also sways the decision-making. Steer wouldn’t be surprised to see another wave of oragnizations say they want to get costs out of their business and asking how to do that quickly without risking the business. Despite a growing acceptance of giving some processes to trusted outsourcing giants, there are still emotional barriers, as well as a rationale that says certain functions should be retained in-house.
The global war for talent is also affecting captive shared services. “It’s all very exciting while it’s being created and set up, but once it’s there and it’s stable and running, it becomes very rote—as it should do—like a machine, and it challenges the organization to keep top talent,” said Steer. “Individuals will tend to move on, because they like change, they like dealing with new things.”
He confirmed that there is movement toward shared services doing higher-level functions, much in the same way that third-party outsourcing has climbed up the value chain. Indeed, many of the big names in outsourcing have a heritage around SSCs and captives operating in the same space. “If you are going captive, this is what you need to do,” said Steer. “You have to move up the value chain.” Some of it is still transactional stuff, but more of it is becoming the “sexy” strategic type of stuff.
As outsourcing and shared services tread parallel paths, said Steer, there is less differentiation between them, especially with a hybrid model, which is emerging.
One area of potential evolution is particularly intriguing to Steer: co-opetition among client organizations. “Why do organizations continue to grow their own SSCs when they can have a SSC that services the whole industry?” he asked. On the financial side, every bank had its own check-clearing facility, but that’s gone to third-party providers. He predicts there will be a move toward alliances in that space, with companies crossing boundaries and asking why every company has its own SSC when it can share a single center.
Of course, in a compliance-centric era, this raises the issue of trust, especially around data security. Steer, however, believes all that can be handled by segmenting what each company is willing to share and retaining control over key customers and suppliers that will never go into a shared-services center.
In the future, the use of shared services is only expected to grow. Hackett research reports that centers that employ more than 1,000 people are forecast to double in size. And medium-sized centers will expand to become large ones. In addition, the talent in the average SSC for world-class companies gets paid more and tends to have more certifications than employees of peer companies. Weller commented that at Pfizer, when she brought in people who had degrees in their areas of expertise, people thought she was “nuts.” Those days are waning fast.
Moving Forward
Michel de Zeeuw, former senior vice president of global finance shared services at Royal Electronics, made the transition last year to vice president of BPO, under a seven-year, $250 million deal that transferred three offshore services centers, 1,400 full-time employees, and multiple business functions to the Indian provider—ushered in by a one-time payment of $28 million. De Zeeuw will be the Philips account executive at Infosys for the foreseeable future, as his role and that of the Philips’ service centers take shape and imprint a new, global Infosys on the world BPO market.
Predictably, the initial driver for creating the offshore captive model was cost—but the objective was to generate savings through labor arbitrage, as well as generate productivity and service improvements in the long run. Initially, Philips created a captive model rather than outsource because it believed it could provide what it needed on its own. De Zeeuw cited three reasons:
“First, we had the know-how, generally, with people who had done it earlier; second, we had a presence offshore in these countries where we went to support us in the process; and third, we had the scale to generate enough savings. We could do it ourselves, and we thought creating a captive setup would help take full advantage of cost reductions and reduce the risk of moving to outsourcing directly.”
However, the company always knew it would eventually turn to outsourcing, and after three-and-a-half years, it recognized that outsourcing would help it reach the next level for a shared-services organization and meet strategic objectives.
The key benefits Philips sought were to grow more offshore, transfer more work, and create more value. The deal facilitated these goals because Infosys offered more services than Philips had, in terms of scope, as well as the ability to shift work around because of its size. In turn, Infosys gained substantial scale and a global footprint as a result of the contract, offering a true symbiosis under which both organizations could grow while minimizing risk.
Under its captive model, Philips recognized that at some point a company that has reduced costs also improves processes and productivity, thereby reducing its scale so costs aren’t optimized any more. Turning to an outsourcer that had a bigger focus on technology and greater ability to improve on that side helped it continue to reduce costs.
For Philips, the gradual transition showed that the captive shared-services model still has an important role to play—one that serves European organizations well.
“The ‘Steppng Stone’ Effect” – try to google this topic – you will see that you are wrong.