An updated approach helps take shared services to the next level, combining outsourced service providers and internal service centers.
 
by Mark Klender and Aprajita Rathore
 
The challenges and opportunities presented by an increasingly global economy are pushing companies to seek significantly greater performance from their shared services organizations (SSOs). To take shared services to the next level, forward-thinking companies are adopting a portfolio approach in which they strategically and proactively balance flexible options with respect to:
• What the SSO does: Operating multiple functions and processes and servicing a number of business units;
• How the SSO sources services: Flexing between outsourced and
in-house service delivery; and
• Where the SSO operates: Leveraging the labor pools, costs, and risks of geographies across the globe.
 
When applied to all three dimensions of what, how, and where, a portfolio approach can reduce the cost of shared services by 25 percent to 60 percent—a function of process standardization, operating efficiencies and flexibility, labor cost arbitrage, and tax efficiency. A portfolio approach can also provide other substantial benefits, including reduced risk, greater scalability, workforce flexibility, and access to deeper and broader infrastructure, talent pools, and capabilities.
 
Many “early adopters” of a portfolio shared services approach reached that state through a slow evolutionary process, starting cautiously with a limited number of functions, considering only in-house service delivery, and slowly expanding geographies. Thanks to these trailblazers, however, the body of experience and knowledge exists today to enable more rapid deployment and transformation to a portfolio approach. For organizations in the relatively early stages of shared services, the lessons learned represent an opportunity to leapfrog to a state that might otherwise take years to attain. For companies with more mature SSOs, this body of knowledge can be leveraged to get greater value out of their existing shared services.
 
This article presents the results of a 2008 Deloitte survey of 35 shared services leaders that explored the ways companies are using a portfolio approach in their shared services operations.
 
Functions, Processes, Businesses
Moving multiple functions, processes, and business-unit customers to shared services can reduce cost by consolidating and standardizing larger numbers of business-specific support processes. It can also help reduce risk by using a single set of work processes, centralizing decision-making, and applying central governance and controls. For companies moving toward a more integrated operating model in their larger business, multi-functional shared services is a natural step to pursue greater integration in their shared services operating model.
 
Survey respondents were eager to take advantage of the potential benefits of extending their SSOs’ service scope and customer base. Eighty-nine percent reported that they planned to add more processes, functions, businesses, or geographies to their SSOs. Of special note, many respondents plan to expand shared services’ scope to knowledge-oriented areas that have traditionally been closer to the businesses, including research and development, engineering, and sales and marketing. (See Figure 1, left. What percentage, on average, does your organization have in shared services for the following areas?)
 
Click here to view Figures 1 and 2

 
As a group, survey respondents also anticipated moving away from functional segregation and increasing cross-functionality of their shared services operations. (See Figure 2, below right: Are your shared services predominantly operated for each function, cross-functionally, or an equal mix?) This trend will continue, as cross-functional SSO management offers many benefits over a functionally siloed management approach, among them:
• Improved Efficiency and Accuracy. Support functions often need to interact with each other to deliver an end-to-end process. Placing those functions under single management in a multi-functional SSO can enhance seamless process design and execution.
• Improved Data Integrity. Putting multiple functions in the same SSO can facilitate the integration of multiple technology platforms and databases, allowing data to more seamlessly flow through a multi-functional process and reducing the risk of inconsistencies among redundant “active” databases used by different functions.
• Economies of Scale. Physically locating a multi-functional SSO at one site can drive greater synergies and economies of scale on core shared functions and supporting facilities, site support and IT infrastructure requirements, and costs. Typical scale economy benefits are in the 5 percent to 10 percent range.
• Easier Cross-Functional Improvement. The functional diversity and change culture of multi-functional shared services can serve as a laboratory for innovation, facilitating the sharing and implementation of effective practices across functions.
• Better Talent Management. A multi-functional SSO can give its employees a greater variety of work opportunities, allowing them to cross-train and rotate jobs among different functions. Cross-staffing can also give the SSO more flexibility to scale up and down in a particular function by allowing people to be redeployed to different functions if needed.
 
Expanding the portfolio of shared services functions, processes, and business-unit customers can pose a number of challenges:
• Resistance from Business Units. Many companies encounter considerable business-unit resistance when trying to expand an SSO’s service and customer footprint. One way to overcome this is to make focused efforts to “sell” the SSO to the company’s internal customers. At one technology company, for example, the leader of the SSO’s internal business development group meets personally with business-unit leaders to discuss ways to expand the benefit of shared services by increasing the number of in-scope processes or geographic regions.
• Governance and Accountability. It is not always clear to whom a multi-functional SSO should report or who should have overall responsibility for its performance. Previous research by Deloitte suggests that the predominant model is to place multi-functional SSOs under the CFO, although we also see a growing trend of creating a vice president of shared services role.
 
A multi-functional SSO can also face challenges in balancing the demands of multiple functional stakeholders, and the delivery of end-to-end processes with multi-functional involvement can complicate the service chargeback model. For all these reasons, strong governance, control, and service delivery and chargeback management are a must for an effective multi-functional SSO.
 
 
Outsourcing and In-House
The survey confirms the emergence of a portfolio approach with respect to service delivery. Many of our respondents used a mix of outsourced service providers and internal service centers, outsourcing a fair percentage of their shared processes today and planning to outsource even more in the future. (See Figure 3, page 52: Please indicate the percentage of your outsourced shared operations for the following functions.)
 
In a portfolio of service delivery options, it is important to coordinate the service delivery strategy to leverage strategic sourcing cost savings, drive effective processes and service delivery, and maintain effective governance of both external and retained services. In practical terms, this involves having the SSO, in close collaboration with functional leaders, manage both the strategy and the day-to-day vendor relationship management for outsourced shared processes.
 
Under a coordinated approach, the advantages of combining in-house with outsourced service delivery can include:
• Lower Start-Up Costs. Outsourcing can reduce the initial cost of moving services out of local offices, including significant IT, facilities infrastructure, and one-time human resources costs.
• Better Geographical Coverage. Outsourcing providers’ diverse global footprints can allow companies to place services in a preferred geography without the effort and investment needed to create an in-house presence in a new location.
• Improved Scalability. The external provider model is designed for flexibility, adding and contracting work within and across centers. Outsourcing can be part of an SSO’s strategy to add resources quickly to handle peak periods and scale back during slow periods.
• Increased Access to Effective Practices and Specialized Skills. Outsourcing can improve a company’s access to industry practices and specialized capabilities that may be difficult to quickly obtain in-house.
• Improved Business Continuity. Using several service providers can allow companies to more easily turn to another service provider as backup if a primary provider falls through.
• Enhanced Career Planning. Using outsourcers to complement an internal SSO can allow the company to focus the SSO on higher-value activities and thereby provide more attractive career paths for SSO employees.
 
Outsourcing relationships should be established and managed with a focus on customer service, service quality, and risk management; survey respondents reported that their internal SSO operations outperformed outsourcers in all these areas. In addition, each company should periodically reevaluate its SSO’s mix of in-house and outsourced service delivery for continued alignment with the company’s cost and service goals.

 
Click here to view Figures 3 and 4 
 
Location & Global Management
Reaching beyond in-country service delivery to take advantage of the cost arbitrage and talent pools of more distant geographies is becoming standard operating procedure for SSOs. Our survey found that:
• Slightly more than 40 percent of respondents had centers in the Americas. Seventy
percent of those centers were in North America, and 30 percent were in Latin America.
• Thirty-five percent had centers in Europe, the Middle East, and/or Africa. Of these, almost 80 percent were in Europe, with the remainder in the Middle East/Africa sub-region.
• Twenty-five percent of respondents had centers in the Asia-Pacific region. India, the Philippines, and China were the most popular locations in this region.
 
While our study shows that regional centers are the predominant model today, nearly a third of our respondents operate in a “hub-and-spoke” structure that splits work between a global center for highly transactional, location-agnostic processes and regional centers for specialized or location-specific processes, knowledge, or skills. (See Figure 4, page 53:  What is the predominant operational model for your SSO?) By eliminating regional redundancy of simple, location-agnostic processes, a hub-and-spoke arrangement can operate at a significantly lower cost than would be possible under a distributed model. In our experience, these savings can range from 25 percent to well over 50 percent.
 
Moving directly to a hub-and-spoke model from decentralized country operations can help a company realize the substantial benefits that the hub-and-spoke system can offer in as little as one-half to one-third of the time that it typically takes to evolve shared services up through the regions, and without the substantial rounds of labor and operating disruptions from multiple reorganizations. Factors to consider in such an initiative include:
• Which Processes to Place in the “Hub” and which in the “Spokes.” Lower-value-added, standardized, and automated processes are the best initial candidates for global hubs, while high-value-added, customer-facing, and interaction-intensive processes are generally placed in regional centers closer to the home country. As companies become more comfortable with shared services, more complex processes are often later moved to the global hub or outsourced.
• Labor Quality and Availability. Increasing competition for skilled resources in offshore markets makes it imperative to focus on the quality and availability of labor, as well as its cost. Companies should be alert to the risk of wage escalation, high turnover rates, and/or unfavorable labor climates in popular offshore locations.
• Risks Associated with Out-of-Country Operations. Factors such as business customs, governmental issues, and cultural differences can make distant centers more difficult to establish, operate, and govern than nearby ones. The choice between established and pioneering locations depends on a company’s comfort with the trade-off between costs and risks related to labor, infrastructure, geopolitical conflicts, language, and cost escalation.
 
Benefits and Challenges
Now is the time for companies to pursue a portfolio approach to shared services aggressively, whether they are mid-way through the shared services journey or just starting out. Such an accelerated approach is not without its challenges, however. Proactive change management, strong governance, senior management leadership, and effective collaboration with customers and external providers are the most critical “must-haves” for achieving the desired results.
 
Following are some recommendations that you should consider:
• Add the more purely transactional, back-office activities into the shared services portfolio before tackling customer-facing, skill-intensive activities. The customer interface and chargeback arrangements for transactional activities are simpler to develop, and business-unit customers may be more amenable to using shared services for back-office functions.
• Aim to roll out a broad but homogeneous scope of services across business units, even if it means getting fewer business units on board at a time. Pushing out the same set of services to the business units at once—as opposed to implementing one or two services at a time over an extended timeframe—can simplify shared services management and governance, economize on knowledge transfer effort and costs, and drive process standardization among the business units.
• Standardize data and technology platforms. Technology standardization can reduce data conversion and maintenance issues, as well as the risk of errors and delays due to data incompatibility. In a global SSO, standardized technology has the additional benefit of allowing work to be shifted from location to location more easily as needed.
• Standardize processes. The more standardized an SSO’s global processes, the less complex its operations will likely be, and the less it will likely cost to run. A phased approach in which processes are standardized in certain regions or countries as a pilot, then rolled out globally once the kinks are worked out, can help facilitate the process.
• Be sensitive to internal stakeholders’ appetite for change. The more transparent a shared services reorganization is to the internal customer, the less resistance it will likely encounter. Especially at a relatively decentralized company, pushing too hard, too fast can spark resistance that can lead to exceptions in an SSO’s standardized processes and technologies—exceptions that the business units might not have requested if they had been fully on board with the effort. Significant changes are usually best made in a way that only affects the customer once.
• Proactively and frequently leverage senior leadership support. Continuous, consistent senior leadership endorsement of the SSO—combined with appropriate monitoring and enforcement—is vitally important. Corporate leaders should continually be on guard against the business units’ tendency to rebuild local support organizations instead of using the SSO, whether through outsourcing or by creating internal “shadow organizations.”
• Engage and communicate. Creating and managing a portfolio approach to shared services can mean a great deal of change for both internal customers and shared services staff. To combat fears and increase buy-in, a company needs to all internal stakeholders understand how the initiative will change their world. Business-unit leaders, business-unit employees, shared services management, and shared services staff should all receive frequent communications through a variety of channels: e-mail, voice mail, road shows, and personal meetings with company leaders.
 
Today’s competitive and cost challenges are making the shared services imperative more pressing than ever. Pursuing a portfolio approach to shared services can provide substantial benefits on many fronts: Greater efficiencies, substantially lower costs, increased scalability and flexibility, and reduced risk. While the challenges are not trivial, the benefits of a portfolio approach more than justify the investment—and will get the company far greater results much faster. Empowered by the experience of others that have moved down this path, companies that can quickly build, manage, and expand a portfolio of shared functions, service delivery methods, and locations will be positioned to thrive in today’s demanding environment.
 
Mark Klender is global location strategy practice lead for Deloitte’s Comprehensive Shared Services practice. He has more than 20 years’ experience spanning location strategy, cost reduction, and shared services. Aprajita Rathore is senior manager in Deloitte Consulting’s strategy and operations practice with over 12 years’ experience advising on global transformations in various industries around the world.