U111032_Emerging Role of Shared Services

7/29/2019 U111032_Emerging Role of Shared Services

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Emerging role of

Shared Services

Submitted as an Individual Assignment in PITEO

Institute: Xavier Institute of Management, Bhubaneswar

Submitted to:

Professor Francis Castelino

Submitted by:Mayank Patnaik

U111032

PGDM- II

Batch- 2011-13


2/23

Table of ContentsLetter of Transmittal ................................................................................................................................... 3

Executive Summary ................................................................................................................................... 3

1. Overview of Shared Services Model................................................................................................... 4

2. Evolving Patterns of Shared Services Model .................................................................................... 5

3. V2I Model of Shared Services Unlocking hidden Value.............................................................. 7

4. Conceptualizing Shared Services as a 4 Change Program......................................................... 10

4.1 Implementation plan for 4 change program......................................................................................... 10

5. Trend of Transformational Shared Services................................................................................... 12

5.1 Key Objectives of Integration Competency Center .......................................................................... 13

5.2 Value Proposition for Integration Competency Center: ............................................................. 14

5.3 Inclusive Foundation for Integration Competency Center: ........................................................ 15

6. Case Studies: A Real Insight into Shared Services .................................................................................. 16

6.1 Financial Sector Shared Services: Based on Motorola: A Successful Implementation ............... 16

6.2 Modeling an HR Shared Services Center: An Unsuccessful Experience of an European MNC ... 17

7. Economics of Shared Services ................................................................................................................ 20

8. Summarizing: Shared Services Start of a new Era ................................................................................ 21

9. References .............................................................................................................................................. 23


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Letter of Transmittal

This report was prepared as part of Planning IT Enabled Organizations project assigned

by Professor Francis Castelino to the students of PGDM II. The objective of this report

is to analyze and study the topic: The emerging role of Shared Services Model

I thank Professor Francis Castelino for giving me the opportunity to research and report

on the chosen topic.

In case of any query, please feel free to contact:

Name Mail ID

Mayank Patnaik [email protected]

Executive Summary

Creating shared services requires a coordinated integration of four change programs:Business processes redesign (BPR), organizational redesign, sourcing redesign, andtechnology enablement. If managed properly, shared services reduce costs, improveServices, and can even generate revenues. However, surveys show that manyexecutives fail to achieve the promised results. In this article, we present the lessonsReuters learned during a five-year journey to create global shared services within itsfinance organization. The lessons highlight how to: (1) Adopt the right transformationapproach; (2) Identify processes for shared services by analyzing the costs, attributes,

and readiness of process activities; and (3) Get business unit clients and internal staff tocooperate and embrace

Organizations create shared services to dramatically reduce costs, improve services,and even to generate revenue. Early adopters of shared services reported enormousbenefits. General Electricrecognized as the first leader of shared servicesimplemented shared financial and accounting services in 1984 and reduced staff by30%. DEC created shared financial services in 1985, and reduced finance staff by 450and reported annual savings of $40 to $50 million

Although IT organizations have not adopted shared services as widely as finance andaccounting, recent reports indicate that IT shared services is growing at a faster rate.Indeed, successful management of IT shared services was recently listed as one of theseven habits of effective CIOs.6 CIOs increasingly need to understand shared servicesbecause of the growing trend for them to become part of the CIO portfolio.

The increasing complexity and number of application integration (AI) projects can nolonger be dealt with on a project-by-project basis. The wide scope of AI projectsrequires the use of more specialized organizational structures and competencies.
mailto:[email protected]:[email protected]:[email protected]


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In addition, the diverse and rare skills required (for example, data transformation andreconciliation) tend to be spread across disparate parts of the organization, whichhinders many companies' attempts to take a consistent and integrated approach.Creating a single, shared service center that brings the diverse skill set together helpsto create the focus, momentum, critical mass, processes and standards required to

build and execute a world-class AI strategy.

We looked into the detailed road maps critical success drivers, corresponding changemanagement techniques and the economics involved to arrive at a suitable in depth and

justified analysis of the overall paradigm of Shared Services.

1. Overview of Shared Services ModelThe competition of Multinational Corporation is getting more and more intense with theeconomy globalization, requiring companies to standardize operations to staycompetitive. Shared Services is an effective way of keeping costs down and improvingefficiency by moving certain functions to one central location. Shared services refers tothe provision of a service by one part of an organization or group where that service hadpreviously been found, to more than one part of the organization or group. Thus thefunding and resourcing of the service is shared and the providing department effectivelybecomes an internal service provider. The key is the idea of 'sharing' within anorganization or group.

The purpose of shared services is the convergence and streamlining of anorganizations functions to ensure that they deliver to the organization the servicesrequired of them as effectively and efficiently as possible. This often involves thecentralizing ofback office functions such as HR and Finance but can also be applied tothe middle orfront offices. A key advantage of this convergence is that it enables theappreciation ofeconomies of scale within the function and can enable multi functionworking (e.g. linking HR and Finance together), where there is the potential to createsynergies.

Facing major organizational change possibilities such as shared services, firms need tostrategically decide whether and how to transform their businesses. Experience showsthat, in order to successfully implement shared services, firms generally need totransform their service activities through several steps, namely, simplification,standardization, consolidation, in-sourcing, or outsourcing (e.g., Gould & Magdieli,2007), while strategic decisions need to be made by each firm on when and how topursue these steps. These decisions require a proper conceptualization and valuation ofdifferent shared services transformation approaches, especially in an uncertainbusiness environment
http://en.wikipedia.org/wiki/Back_officehttp://en.wikipedia.org/wiki/Front_officehttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Economies_of_scalehttp://en.wikipedia.org/wiki/Front_officehttp://en.wikipedia.org/wiki/Back_office


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2. Evolving Patterns of Shared Services Model

In terms oflocational variations there are three basic types of shared services

1. On-shore: Work carried out by the company at a company at the clients location.

2. Near-Shore: Work carried out at a nearby location which is basically not far offfrom the clients location.

3. Off-Shore: Work can be carried out basically anywhere in the world but not atclients location or at a nearby location.

In terms of work patterns shared services have a come a long way and is paving away for a healthy future. The following points highlight the growth and journey of sharedservices.

1. Organizations that have centralized their IT functions have now begun to take aclose look at the technology services that their IT departments provide to internal

customers, evaluating where it makes sense to provide specific technologycomponents as a shared service. E-mail and scanning operations were obviousearly candidates; many organizations with document-intensive operations aredeploying scanning centers as a shared service

2. The most interesting trend has been seen in shared services role in enterprisecontent management. The exponential growth in the amount of unstructuredcontent is making ECM a priority within many organizations. Where previouslycontent management may have been deployed to meet departmental needs, incertain niches within the organization, it is now being recognized as anenterprise-wide need: an infrastructure investment rather than a nicheapplication. Many CIOs have concluded that if ECM functionality is to be offeredto the enterprise, it makes sense to offer that functionality as a shared service, asa way of cost-effectively meeting the content management needs of large userbases, with potentially diverse requirements for various components of ECMfunctionality.n addition to cost-effectiveness, the ECM shared-service model alsoallows an organization to make better use of limited IT resources particularlywhen many upcoming IT projects tend to require one or more components ofECM functionality.

Why Implement Shared Services in ECM?

One of the most compelling forces driving ECM shared services is the economicsof addressable seat costs versus utilized seat costs. ECM remained a nicheapplication within many organizations because organizations purchasedenterprise licenses that were then underutilized. Addressable seat costs (if ITwere able to deploy ECM to everyone), are likely to be relatively low. In mostcompanies, ECM has tended to be rolled out to only a subset of the potentialuser base, which means that the addressable cost per user may actually beconsiderably higher resulting in prohibitively high utilized costs per seat. Under


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3. V2I Model of Shared Services Unlocking hidden Value

1

Vision to implementation model of shared services unlocks potential hidden value bybringing together people process and systems. Implementing a shared servicesprogram is by no means an easy undertaking. It does not happen by accident: itrequires desire, discipline and the ability to execute to a plan. Shared services meansmore than simply moving people together into one location and giving them commonprocesses and systems. The process involves a change in mindset and an increasedfocus on the business. Successful shared services programs integrate processes,people and technology to deliver a totally new business capability.

a. Assess the potential Value:In the initial phase, executives try to assess the potential value of implementing ashared services model. These are achieved by asking a set of vital questions which areshown below.

1Based on Global Shared Services Model Followed By Accenture


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b. Define the overall Strategy and plan:

The more discrete and compartmentalized the implementation plan, the easier it is to

manage to the desired outcome. The plan must encompass all aspects of the projectitself (tasks, deadlines, and deliverables) and must also identify what impacts otherconcurrent projects outside of shared services might have on implementation.

c. Create the Shared Services Design:n the design phase, organizations define, in detail, the components of the new sharedservices operation. The shared services operating model should remain at the heart ofthe effort, outlining the goals and strategic objectives for the design team. Thedeliverables developed during the design phase address the following key questions

Clearly defining the scope of the

new organization, for example, is

essential. The scope must be

broad enough to achieve the

benefits desired from a

standpoint of cost savings and

efficiency improvement, but

compact enough not to

overwhelm the organization as awhole.

Current-state assessment

that identifies what an

improved service delivery

model would look like ,

what gaps must be filled

to reach it and what the

value of pursuing the

shared services model is

to the organization

This gap assessment

provides key input needed

to develop the operating

model and a fact-based

business case, something

begun in this phase of work

and then validated in the

design phase


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d. Building and deploying the solution Architecture:The build and deploy phase moves the shared services program beyond theory so that

the shared services center organization, processes and technology take physical form.This last phase of work typically lasts anywhere from 6 to 18 months, depending on thescope and scale of the effort. Deployment activities are generally completed in stages,transitioning a subset of the final processes and/or customers each time. A short periodof stabilization is advisable after each rollout.


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4. Conceptualizing Shared Services as a 4 Change Program

According to Accenture, the definition of shared services is the consolidation ofsupport functions (such as human resources, finance, information technology, and

procurement) from several departments into a standalone organizational entity whoseonly mission is to provide services as efficiently and effectively aspossible.Organizations create shared services to dramatically reduce costs, improveservices, and even to generate revenue. Early adopters of shared services reportedenormous benefits.

2

4.1 Implementation plan for 4 change program

a. Business Process Redesign:

Phase 1:

BPR activity was to reduce the number of idiosyncratic business processes by creatingglobal policies and standard business processes. In addition to reducing costs, anothermajor reason for redesigning business processes was to prepare for the neworganizational design. The company needed to standardize its processes so it could

2 Based on Strategic Change management Plan implemented at Accenture and GE


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relocate some of them from decentralized business units to new regional servicescenters.

Phase 2:

To ensure processes work in the new organizational Structure.

3

b. Organizational Redesign:

Phase 1:

The main goal of organizational redesign activity is to move as many end-to-endprocesses as possible from decentralized business units to the new focused servicescenters.The idea was that the new centers would be client-focused and house subjectmatter experts.

3MIS Quarterly: Creating Global Shared Services: Lessons from Reuters.


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Phase 2

Decide which processed to move where

c. Sourcing Redesign:

Phase 2:

Only comes into picture in phase 2 where it is Create new captive center and outsourceto fill gaps in internal capabilities

d. Technology Enablement:

Phase 1:

Simple and complex technologies are used to implement the newly designed businessprocesses.

5. Trend of Transformational Shared Services

The Integration Competency Center (ICC), sometimes referred to as an IntegrationCenter of Expertise (COE), is a shared service function within an organization,particularly large corporate enterprises as well as public sector institutions, forperforming methodical Data Integration , System Integration orEnterprise ApplicationIntegration.

Data integration allows companies to access their enterprise data and functions,fragmented across disparate systems, in order to create a combined, accurate, andconsistent view of their core information as well as process assets and leverage themacross the enterprise to drive business decisions and operations. System Integration isthe bringing together of component subsystems into one system and ensuring that theyfunction together effectively. Enterprise Application Integration enables efficientinformation exchanges and business process automation across separate computerapplications in a cohesive fashion.

Integration refers to the objective of the ICC to take a holistic perspective and optimizecertain qualities such as cost efficiency, organizational agility and effectiveness,

operational risk, customer (internal) experience, etc. across multiple functional groups.

Competency refers to the expertise, knowledge or capability that the ICC offers asservices.

Centermeans that the service is managed or coordinated from a common (central)point independent from the functional areas that it supports. Large organizations areusually sub-divided into functional areas such as marketing, sales, distribution, finance,
http://en.wikipedia.org/wiki/Shared_serviceshttp://en.wikipedia.org/wiki/Data_Integrationhttp://en.wikipedia.org/wiki/System_integrationhttp://en.wikipedia.org/wiki/Enterprise_Application_Integrationhttp://en.wikipedia.org/wiki/Enterprise_Application_Integrationhttp://en.wikipedia.org/wiki/Data_integrationhttp://en.wikipedia.org/wiki/System_integrationhttp://en.wikipedia.org/wiki/Enterprise_Application_Integrationhttp://en.wikipedia.org/wiki/Cohesion_(computer_science)http://en.wikipedia.org/wiki/Cohesion_(computer_science)http://en.wikipedia.org/wiki/Enterprise_Application_Integrationhttp://en.wikipedia.org/wiki/System_integrationhttp://en.wikipedia.org/wiki/Data_integrationhttp://en.wikipedia.org/wiki/Enterprise_Application_Integrationhttp://en.wikipedia.org/wiki/Enterprise_Application_Integrationhttp://en.wikipedia.org/wiki/System_integrationhttp://en.wikipedia.org/wiki/Data_Integrationhttp://en.wikipedia.org/wiki/Shared_services


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human resources to name just a few. These functional groups have separate operationsand are vertically integratedand are therefore sometimes referred to as "silos" or"stovepipes". From an organizational perspective, an ICC is a group of people withspecial skills, who are centrally coordinated, and offer services to accomplish amission that requires separate functional areas to work together.

5.1 Key Objectives of Integration Competency Center

4

ICC as a concept is fairly simple. It is embodiment of the IT management best practicesto deliver shared services. However, being an organizational concept, it is far morechallenging to implement in practice than the conceptual view because everyorganization has different DNA and it takes specific personalization/customization effortfor ICC that makes the ICC initiative successful. Here are some of the common

challenges in ICC establishment journey:

Change management in terms of technology, processes, organization structure Ability of the organization to deal with the pace and quantum of change Alignment of stakeholders and process owners for ICC strategy

4Integration Competency Center Management Guide : 2009 Publication


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Inappropriate ownership level for ICC program and lack of senior managementsponsorship

Highly tactical focus and business program level constraints Ignoring foundation elements and jumping to implementation directly Inappropriate funding.

5.2 Value Proposition for Integration Competency Center:

An enterprise-wide, structured, and well-managed framework for EAI provides

Business Alignment: Business objective-driven integration environment withincreased visibility, informed and faster decision making

Strategic Technology Ownership: The EAI governance model delivers ametrics and functional structure, and a comprehensive funding and costing model

Lower TCO: Economies of scale ensure productivity gains and higher resourceutilization from repeatable infrastructure (Giga: Average saving of 25%-30% indevelopment cost and 30%-75% saving in operations and maintenance cost canbe expected)

Higher Solution Quality: Efficient operational practices ensure improved qualityand process performance

Lower Risk: ICC ensures agility and flexibility to manage changes in businessand technology environment. In addition, it enables effective technology lifecyclemanagement and faster maturity of integration.

Now from the above two points which I have mentioned we have seen the objectivesand the strong value proposition that ICC offers .The point of fact now remains is thathow can an organization achieve those set of objectives and simultaneously alsoprovide .Now essentially we need to have a clear cut plan on how to achieve IntegrationCompetency Center Shared Services which we are going to see in the below analysis.


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5.3 Inclusive Foundation for Integration Competency Center:In addition, the diverse and rare skills required (for example, data transformation andreconciliation) tend to be spread across disparate parts of the organization, whichhinders many companies' attempts to take a consistent and integrated approach.

5

Creating a single, shared service center that brings the diverse skill set together helpsto create the focus, momentum, critical mass, processes and standards required tobuild and execute a world-class Application Integration strategy. Now the figurerepresents the entire detailed plan to achieve inclusive deployment of Integration

competency centers.

5 Detail Implementation Plan for ICC at Infosys


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6. Case Studies: A Real Insight into Shared Services

6.1 Financial Sector Shared Services: Based on Motorola: A Successful

Implementation

The basic logic of the shared services is simple: Providing the services in one locationwhich is to be used by several recipients in several other locations. It consists of theshared part which is used by several recipients such as internal customers andpartners, and the services part which focuses on the services for internal andadministrative purposes. The shared services almost only concentrate on the supportingfunctions such as human resources, IT and finance, but not on the core business orother operations. Financial Shared Services, therefore, is a professional financialservices centre; it benefits companies and any other business organizations a lot,undoubtedly. However, there are also risks in implementing the system.

Critical Advantages Seen from the Model by Motorola:

a. The Motorola Accounting Services Center (MASC) which is located in Tianjin, Chinais one of the significant examples to demonstrate the organization and the function ofthis service model. There is more than 220 people work at MASC to process 90% of theglobal Accounts Payable invoices, more than 80% of all Travel and ExpenseStatements, more than 80% of all inter-company transactions, more than 70% of allFixed Asset transactions and it performs more than 3,000 account reconciliationsmonthly.b. Financial Shared Services at Motorola is able to target the vital factors in processesthat better align the business goals with the requirements and expectations of itscustomers.c.Financial Shared Services plays an important role in emphasizing global team spiritsand eliminating cultural

differences. The slogan of One Motorola can be seeneverywhere in MASC, which greatly stimulates the employees enthusiasm and unitespeople from different nations. In addition, FSS have delivered a consequence ofcorporate government legislation, such as Sarbanes-Oxley. In New York Times, FSShelps them to reduce the time they spend on Sarbanes-Oxley.


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Risks Faced by Motorola and mitigation Steps:

6

6.2 Modeling an HR Shared Services Center: An Unsuccessful

Experience of an European MNC

What is it?

An increasing number of large and multinational organizations are moving to sharedservices models in delivering the human resource function. It is commonly believed thatthe adoption of an HR shared services model can transform the role of HR by enablingthe HR function to be more strategic at the corporate level and more cost-effective atthe operational level.

The delivery of the human resource function has undergone considerable changes inrecent years, especially within large multinational corporations (MNCs). Traditionally,the typical HR structure in a large MNC starts with a small team at the corporate levelthat is responsible for strategic issues. Much of the operational HR function is carriedout at the national level. This function is often devolved to the branch-office level,

supported by a small on-site HR department. However, an increasing trend in recentyears has been the establishment of HR shared services centers that deliver thesefunctions more centrally, and often more remotely, from the subsidiaries of the firm.

In terms of user orientation, there are two broad types of HR shared services. The firstis the set of shared services set up by large organizations to provide HR services bothto their own organization and to external client organizations as an outsourcing

6 Financial shared services in multinational corporations: Based on Motorola


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business. Examples of these organizations include BAE Systems in the UnitedKingdom. The second type of HR shared services refers to those set up, again, by largeand often multinational or multisite organizations that aim to restructure their HR serviceprovision through recentralization and the creation of an internal market system.

Why did the MNC adopt HR Shared Services?

The Change to the Shared Services Process

In the reorganization of the delivery of the HR function in our MNC in Europe, most ofthe HR offices at the branch level were removed or radically slimmed down, with 150HR jobs made redundant and a small number of HR staff redeployed and relocated.The call-centerbased Employee Services Center was set up to deal with HRadministrative transactions and provide advice through the help desk. Self-help, onlineHR information system (HRIS) was introduced for employees to input and update theirpersonal data on the system. The main objective was to the intention was to create anenvironment where all the HR administration is taken out of the line, automated and putinto a shared service center.In addition, it was believed that this change would enablethe HR function to develop centers of expertise that would provide consultants andadvisors to HR professionals.

Implementation model revolved around 4 axes:

The model is defined along two axes: strategy versus operations and process versuspeople. The roles are strategic partnershelping the business to successfully executestrategy; administrative experts improving organizational efficiency by re-engineeringthe HR function and other work processes; employee champions maximizing

Adoption Potential Benefits of Adopting Shared Services

Integrated total solution approach to problems through recentralization of the HRfunction (one stop shop)

More selective and strategic contribution from HR because they are not focused on doingadministrative work

Improved cross-group learning and sharing of good practices through having a commoninformation base

Better management information, provided more consistently across the organization as awhole

More efficient resourcing through economies of scale in staffing and facilities

Greater efficiency and professional provision of HR services through streamlining andsimplifying Services. Improved career development for HR staff Higher customer satisfaction ratings through an improved match between customer

expectations and service. Better service specification (e.g., via service-level agreements) and performance

monitoring as a result of the internal market system. Facilitation of corporate investment in computing and communications infrastructure by

arguing the case on a collective basis.

Greater trans arenc of cost of services and easier monitorin of bud ets


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employee commitment, competence, and their overall responsiveness to change; andchange agentsdelivering organizational transformation and culture change.

7

Findings and Discussions:

Organizational changes can be unsettling to employees, especially changes of this kindthat require employees to adopt different ways of obtaining HR assistance anddiscussing sensitive information. When poorly managed, these changes are likely tocause resentment and resistance among the workforce, as most major organizationalchanges tend to arouse worry and resentment to various degrees.

8

7Source: Consult-Corp UK document, 20028 MODELING AN HR SHARED SERVICES CENTER: EXPERIENCE OF AN MNC IN THE UNITED KINGDOM

Strategic Advice: Board

representation

Transformational Shared

ServicesThe employee

Service Center

Business Planning Advice

and Support

Professional Shared

Services: Recruitment

Training etc.


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The recent advent of the HR shared services model as an alternative to traditional HRservice delivery suggests that there no longer is a shared belief of the best way todeliver HR services. Against this background, this case study has reported therestructuring of the HR function of a large MNC section based in the United Kingdom.The companys vision of the change was to develop sophisticated analyses of HR

information, to have clear accountability, and to be cost-sensitive, relevant to business,information- rich, integrated, automated, and streamlined. However, the findings of thestudy suggest that the implementation of the initiative exhibited a number of operationalproblems that are typical in change management. These problems have reduced thequantity and the quality of services for both employees and line managers, and theyhave led to rising levels of dissatisfaction.

7. Economics of Shared ServicesU.S. organizations have been successfully whacking away at overhead and labor costs,specifically, by adopting the centralized, highly automated shared-services model for

core financial transaction processing. Whether these shared services centers arelocated domestically or run by captives based in low-wage countries or evenoutsourced in whole or in part , the first big prize has been significant reduction ofexpensive American head count. Thats typically accomplished by redesigning agedprocesses (e.g., eliminating redundancy) and plugging in tools and technologies thatautomate data processing, data management, and workflows. The second big prize also courtesy of more and better IT comes in the form of higher-quality informationand useful business analytics generated by the finance staff left standing. The thirdbonus prize takes shape as a bank of blinking dashboards that managers can monitorin the merry hunt for continuous improvement (read: endless productivity gains). Andthats not the end of it. Adopting shared services and standardizing processes and

systems around, for example, invoice approval and payment can lead to the capture ofmore early payment discounts and, subsequently, a steep cut in the overall costs ofproducing goods and services. Process improvements available from next-generationshared services can also do wonders for the cash conversion cycle, trade credit defaultrates, relationships with suppliers and customers, and internal cross-functionalcooperation.

It is cheaper!

Organizations using sharedservices centers to process AP

transactions spend less of theirrevenue on AP thanorganizations that manage APtransactions at the business-unitor headquarters levels. Topperformers for this benchmarksurvey question using sharedservices centers spend $0.26 per


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$1,000 in revenue, whereas operating/business unit structures spend $0.66 andheadquarters arrangements spend $0.45. For a $1 billion organization that earned aplace in the top-performer category, a shared services center approach for APgenerates $400,000 in savings.

It Processes More Volume!9

Clearly, shared servicescenters lead to process costsavings. But how strong istheir contribution to processproductivity. Figure 2 showsthat top performers for thisbenchmark survey questionwho do use shared servicescenters process more than20,000 invoices per AP full-time equivalent (FTE),whereas top performers inheadquarters arrangements

average almost 5,000 fewer and operating/ business units average about 8,000 fewer.

8. Summarizing: Shared Services Start of a new Era

Two diametrically opposed perspectives continue to coexist in IT and other businessservice functions. One camp argues in favor of shared services, wherein the ITorganization becomes the internal service provider to the rest of the company. Theother camp promotes outsourcing: the delivery of IT services all done under one roofbut with that roof located somewhere other than at the company.Companies outsourcefor several reasons. Cost saving may be the ultimate reason. But the means by whichthis is achieved vary, from introducing new technology, improving service quality,transforming fixed investments into variable costs, to freeing management time to focuson core competencies. Outsourcing is about the make-or-buy decision, and the termapplies to a broad range of procurement activities in manufacturing (for example,automobile companies purchasing transmission components) or services (for example,

a retailer sourcing TV advertising).Existing corporate structure affects the firm

s choicebetween outsourcing and shared services. Moreover, the creation of internal sharedservices first before outsourcing leads to greater retention of capabilities in-house; bycontrast, a path to outsourcing, without an interim step of internal shared services,engenders greater reliance on suppliers capabilities. In fact, the first path is about

selling shared services assets and capabilities to providers, while the second path

9 Economics of Shared Services : By Mary Driscoll


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is about buying in such capabilities from providers. Outsourcing faces high-powered incentives, with the client able to credibly threaten to terminate the contractwhen the provider underperforms; with an internal SLA, it is not easy to do anything ifthe internal shared services center does not perform. And whats worse, the internaloperation is often a cost center rather than a profit center. At the same time, whenever a

provider is offering standardized processes that could be delivered to more than oneclient, SLA acts as a powerful incentive to perform well for a specific client offering thebonus. By contrast, with processes that are customized for a specific client, SLA doesnot create as powerful an incentive. To summarize, the following is the implication froma perspective based purely on incentives. Outsourcing works best to make an externalprovider truly accountable for performance, whenever processes are standardized andstable for easy SLA specification. By contrast, an internal shared service is a betteroption in cases where processes are either customized or being transformed. Theincentive based argument highlights the fact that parties must rely more on othermechanisms such as trust if outsourcing is applied to processes requiring customizationor transformation.

--------------------------------------------------------------------------------------------------------------------Outsourcing and shared services are both part of organization redesign to giveprimacy to the efficiency of corporate functions. Compared to shared services,

outsourcing is a combination of decisions about the firms external boundaryand its internal structure.Outsourcing may take place at different stages in corporate activities, either as an

initial trigger to bring about fundamental restructuring in a big bang mode ora next step after a period of internal process transformation. Relational contracts,if well designed, can service the maintenance of high-powered incentives toensure the delivery of high-quality service. However, the firm may wish to retaininternal shared services without outsourcing if it anticipates instituting further

business changes in structure and scope of business services. The choicebetween outsourcing versus shared services is not simply a matter of timing (inmature versus immature markets). It is more crucially a matter of long-termcorporate strategy.


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9. References

http://www.webwire.com/ViewPressRel.asp?aId=121091

http://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htm

http://en.wikipedia.org/wiki/Shared_services

https://www.mckinseyquarterly.com/When_to_divest_support_services_2394

https://www.mckinseyquarterly.com/Nonprofits_Ensuring_that_bigger_is_better_1419
http://www.webwire.com/ViewPressRel.asp?aId=121091http://www.webwire.com/ViewPressRel.asp?aId=121091http://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htmhttp://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htmhttp://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htmhttp://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htmhttp://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htmhttp://en.wikipedia.org/wiki/Shared_serviceshttp://en.wikipedia.org/wiki/Shared_serviceshttps://www.mckinseyquarterly.com/When_to_divest_support_services_2394https://www.mckinseyquarterly.com/When_to_divest_support_services_2394https://www.mckinseyquarterly.com/Nonprofits_Ensuring_that_bigger_is_better_1419https://www.mckinseyquarterly.com/Nonprofits_Ensuring_that_bigger_is_better_1419https://www.mckinseyquarterly.com/Nonprofits_Ensuring_that_bigger_is_better_1419https://www.mckinseyquarterly.com/When_to_divest_support_services_2394http://en.wikipedia.org/wiki/Shared_serviceshttp://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htmhttp://www.accenture.com/Global/Research_and_Insights/Outlook/By_Industry/Government_and_Public_Service/SharedServicesInsightsOne.htmhttp://www.webwire.com/ViewPressRel.asp?aId=121091

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U111032_Emerging Role of Shared Services