FAO may be what you have in mind, but consider consolidating services as a possible stop-over before reaching your final destination. If nothing else, get a baseline for comparisons.

by Russell Pass, Niel Simon

One of the most important jobs of an executive team is to determine which responsibilities are so critical to a company’s competitive position that they can only be handled by permanent employees, and which can be outsourced. For astute companies, this is as much a journey as a decision. An important stop along the way to outsourcing can be establishment of a shared-services organization.

Centralization, standardization, and specialization done competently will typically produce benefits for a company independent of whether they are achieved via outsourcing or shared services. There are a number of benefits to a stop at shared services on the way to outsourcing.

These include:
• A better price from external providers, most of whom still use a company’s internal cost as an important reference point, once a company does get around to outsourcing;

• The ability to price services in ways that promote the company’s broader strategy, with a degree of independence from the dictates of the marketplace; and

• The opportunity to address implementation challenges in manageable bites rather than all at once.

Companies that do a good job of implementing shared services may decide to forgo the final step of outsourcing targeted functions. This is particularly true for companies targeting industry-specific functions such as underwriting, policy administration, or portfolio management. While it makes perfect sense to consider outsourcing vertical functions not regarded as core, the third-party market providing such services is not as mature as some would like. Maintaining and operating a shared service then proves to be the best available option.

To build a high performing, shared-services organization, think and behave like a combination of third-party provider and government. The keys to success are:
• Mission and P&L Responsibility. A shared-services organization needs an articulated mission (e.g., the low-cost provider, deliver superior service) and a strategy for achieving its mission. It must bear P&L responsibility for its performance, consistent with its mission and strategy. This will ensure it does not simply focus on one dimension of performance.

• Leadership. Leadership is as critical in shared services as it is in the core business. Organizations that settle for second-rate leadership inevitably find shared-services performance issues becoming a distraction. Not only is the organization getting an inferior mix of service and cost, but also executives aren’t focused where time is of the greatest value. There are two remedies: new leadership or outsourcing.

• Customer Focus and Measurement. A high performing, shared-services organization must have the same focus on serving internal customers as the business has on external customers. Having service agreements in place will both instill a performance discipline and provide useful artifacts and performance detail, should all or part of the organization’s responsibilities eventually become outsourced. Without reliable data on performance—always difficult to obtain in a decentralized organization—both parties will be at a loss when negotiating pricing and service levels.

• Pricing. Pricing is where a shared-services organization’s role as governing authority comes into play. While a third party will work to maximize profit, a shared-services organization can under- or overprice the market to promote the general welfare above that of any particular operating unit. This may sound like heresy to some, but economists have long recognized that firms are better at dealing with certain kinds of transaction costs than the marketplace at large.

As a general rule, pricing should be straightforward and strive to parallel the market. Where a compelling need consistent with a shared-services group’s mission and strategy exists, it should be free to use pricing to entice business units to behave differently than they would in a market-priced environment. Examples include promoting a process or technology standard that is optimal for none but adequate for all and provides compelling economies. The flexibility to price independent of market allows companies to leave decision-making authority in the hands of business unit leaders while still encouraging them to make decisions that are in the interests of the company as a whole.

Establishing an internal shared-services organization is not in the interests of all companies. Many organizations will never muster the political will to make difficult decisions on standardization, process changes, and job reassignments unless driven by a decision to outsource. Others will be unable to attract the kind of leadership necessary to keep shared services off the executive agenda. And some will simply have lost faith in the ability of their own organizations to solve persistent problems without outside intervention. For these organizations, moving directly to outsourcing is the best and fastest way to free up mindshare.

In summary, implementing a shared-services organization as a prelude or alternative to outsourcing is something that should be considered by organizations that have the political will to make significant changes themselves, see structure rather than people as the problem in their own organizations, or are looking to hoard for themselves benefits they would otherwise have no option but to share with their chosen external provider.

Niel Simon is a principal with Bridge Strategy Group with 13 years of experience consulting on issues related to operations design and performance improvement. Russell Pass is a founding member of the group. He has 25 years of experience consulting for companies throughout North America and Europe.