Sourcingfocus.com published a blog where Mathew Wells, Managing Consultant at Hudson & Yorke, discusses what companies need to consider when opting for shared services
‘Shared services’ typically refers to the provision of a shared business function by a single team where it was previously handled by parallel teams in separate organisations, or separate teams within one organisation. For example, under the shared services model, one department provides a service for multiple organisations, or business units within a single organisation. The theory behind shared services makes logical sense – by pooling expertise together, businesses or local authorities can share the benefits of a wider skills base that would previously have been run separately and reduce cost at the same time. However, such cost savings sometimes take years to be recognised, and implementation isn’t always straightforward.
Perhaps the best known advocates of shared services are local authorities, which are well suited to the model due to their non-competitive relationships and the need to cut costs in recent years. In some cases a host council will provide the service for a fee, and in others a private company will take on a contract from a number of councils which then share the cost of the service. The advent of the PSN (Public Sector Network) looks set to further encourage a sharing approach, because one of the barriers in local authorities has been the cost of setting up a secure network infrastructure between the parties to an agreement. The PSN could therefore play a role in transforming collaboration in the public sector.
Whilst much attention is focused on local authorities, shared services have also been popular among financial institutions for years, and particularly so within large universal banks. Working within Hudson & Yorke’s financial services practice, I have seen various universal banks invest in shared services. The model can work well within large organisations because the entire philosophy of shared services lies in utilising economies of scale. Larger firms are naturally more able to benefit from this, but whilst the principle of shared services is easy to comprehend, in practice it can be a minefield. Financial services companies frequently make mistakes during the planning stages – we are aware of examples where firms have not taken the time to properly understand their business and the challenges which they want to solve through shared services. Running headfirst into a shared services model will almost always end in failure without proper planning and understanding. Similarly with governance – companies can sometimes be so fixated with planning and strategy, that they forget how the service needs to be run and managed in subsequent years. Many firms see the signing of a shared services agreement as the end of the process when in fact, it’s just the beginning.
Thankfully there are plenty of examples of best practice within financial services. One such project took place in a large universal bank, which was split into retail, investment, wealth and various other departments. The bank created a shared service centre for its ICT and back-office functions, such as HR, payroll and admin, cutting down on the repetition of these activities to deliver better efficiency at a cheaper cost.
Cost saving is often cited as the main reason that an organisation will opt for shared services, as funding and resourcing of the service is typically shared. The key is in sharing: not only does it reduce costs, but standardises and centralises the whole process. It can make running the back-office functions more efficient, delivering higher quality services to customers at a lower cost.
However, to reach this point a shared services model will require time and investment. In the current austere times we live in, companies are looking to demonstrate immediate cost savings. Shared services will typically take five years to create this cost reduction, with upfront costs such as purchasing of new technology, building and staff only adding to the bill.
When considering implementing a shared services model, strategy is everything. Developing a stakeholder consultation plan and understanding the current and future ICT needs of the organisation is vital. It is important to remember that what may benefit one part of the company may not necessarily benefit another, so consulting with stakeholders to define needs should be the first step. There is no point employing an infrastructure that only one part of an organisation can use – to get the most benefit a shared service should apply to all business units.
Secondly, companies should develop a robust business case. Cost reduction may be one of the main benefits of shared services, but cost savings may not always be clear initially. The principal impetus should be the delivery of real business benefits, specifically accountability.
Finally, companies should be wary of regulation, particularly in the financial services sector. Retail bank ring-fencing for example could lead to banks being wary of implementing a shared services model, only to be forced into a U-turn at some point in the future when regulation demands separation.
The bottom line is that shared services can offer very real benefits, but these won’t appear overnight. A clear strategy and thorough planning are necessary to realise the true potential of a shared services agreement, and once the agreement is in place proper governance is necessary to unlock maximum returns. Clearly there are many aspects to consider, but here are ten top tips for companies thinking about implementing a shared services model:
- Consider whether a shared services model is right for your business. Shared services generally only works for large companies, or organisations with fragmented business units.
- Plan well ahead of time. It normally takes 2-3 years to implement a shared services model successfully.
- Ensure proper governance. The work doesn’t end when a shared services approach is implemented.
- Develop a robust business case that takes into consideration alternative benefits to just cost savings. While cost-reduction will come in time, business benefits need to come first.
- Construct a stakeholder plan. All stakeholders need to have their say on whether shared services will benefit them.
- Ensure that planning doesn’t result in distrust. Remember that some departments within an organisation may have been responsible for certain functions for years – changing this could result in hostility. Communication with key stakeholders throughout the process will ensure sufficient buy-in across all business functions.
- Be aware of regulation and outside influences that could affect how shared services would run in the future.
- Know that centralisation isn’t appropriate for every single function within an organisation. In general, companies shouldn’t centralise core competencies that involve customer contact.
- Ensure that you look through a long-term lens. Don’t expect benefits to be apparent straight away because of the length of time it takes to change adapt and implement, but in the long run shared services can really deliver.
- Ensure that you have the right technology in place to enable shared services. Secure systems that allow joint working are key.
Winner of the 2012 MCA Award for Outsourcing
