Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 2

Note: This is Part 2 in a 5-part series.  You can read Part 1 here.

2.  The vision for Shared Services is not clear and compelling

Once a comprehensive strategy has been developed and the role of the Shared Service Organization in that strategy has been defined, it's essential to craft the vision of the captive service organization.  Too many companies move directly into the execution phase without clearly defining the vision around Shared Services.  A clear and compelling vision will paint a picture of the future, provide a high-level direction for change and create a reason for people to engage in behavior that will enable the achievement of that vision. 

An engaging Shared Service vision is one that is ultimately desirable for the company and its major stakeholder groups, even if it involves short-term sacrifice.  The vision should be realistic and concrete enough that people understand the goals of Shared Services.  The vision should be easily communicated to and understood by disparate stakeholder groups.

Without taking the time to create a clear and compelling vision of the future, it will be difficult to motivate people to commit to the change necessary to be successful.  It's essential that the Executive Sponsor of the initiative create a sense of urgency for moving forward.  People need to understand that there will be some short-term pain for long-term gain, but that the sacrifices are necessary to better position the company in a competitive market.

Harvard professor John Kotter sums it up well in his book Leading Change.  He identifies six attributes for an effective vision:

• Imaginable: Conveys a picture of what the future will look like
• Desirable: Appeals to the long-term interests of employees, customers, stockholders,and others who have a stake in the enterprise
• Feasible: Comprises realistic, attainable goals
• Focused: Is clear enough to provide guidance in decision making
• Flexible: Is general enough to allow individual initiatives and alternative responses in light of changing conditions
• Communicable: Is easy to communicate; can be successfully explained within five minutes

By creating a clear and compelling vision for Shared Services, the business case can be effectively communicated to all relevant stakeholders.  This increases the probability of successfully achieving the goals of the Shared Service Organization.

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 1

Leading companies have leveraged captive shared service centers to drive process standardization, improve service delivery and dramatically reduce costs. Yet many companies continue to struggle with the role of a captive service organization in their overall delivery strategy. Despite upbeat predictions from their business case, some companies have failed to realize the anticipated benefits from their Shared Service Organization. How is it that some companies fail to realize the benefits of Shared Services that many other companies have successfully realized? While every organization is different, there are common traits among companies that are not achieving the goals of their captive Shared Service Organization. Five of these mistakes include:

1. Shared Services is not evaluated as part of a comprehensive delivery strategy
2. The vision for Shared Services is not clear and compelling
3. Processes are consolidated into Shared Services without the required transformation
4. Comprehensive change management is not a priority
5. A strong governance structure is not implemented

In this first post, I'll address the issue of including Shared Services as part of a comprehensive strategy:

1. Shared Services is not evaluated as part of a comprehensive delivery strategy

A Shared Service Organization developed apart from a comprehensive delivery strategy will not effectively support the company’s corporate strategy. Depending on a company's previous success handling specific activities and its overall strategy, some processes that might move to a captive service center would be better of handled by a 3rd party, either onshore or offshore.

High performing companies focus on building a comprehensive delivery strategy that incorporates both captive and 3rd party suppliers. An organization’s service delivery strategy should support the overall corporate strategy and includes a consideration of the company’s existing and planned business lines and geographic presence. It also includes an objective analysis of the supplier-side capabilities from both the captive service organization and 3rd party service providers. Another consideration is the global distribution of support services including an analysis of onshore and offshore delivery options.

One of the major steps in determining where an activity will reside is to document the end-to-end process to include not only the individual activities in the process but also the department (such as Accounts Payable) that will be performing the task.  Once the totality of the individual tasks is understood and documented, a company can make a more informed decision regarding its ability to handle those activities in-house.  A number of factors will go into this decision including the company's ability to handle that specific activity, the effectiveness of handling it and the anticipated cost.  These metrics and others can be evaluated against 3rd party service providers.   When the decision to move to Shared Services is made in conjunction with a comprehensive delivery strategy, rational decisions can be made around the placement and delivery of services.

Developing a Shared Service pricing model that drives behavior

One of the challenges for companies moving to a Shared Service model is to decide how they want to price those services.  How a company chooses to recover its expenses will in large part determine the behavior of the business units who use those services.

I currently have a client that is moving a variety of Finance functions and activities to a Shared Service model.  As part of that discussion we're considering the various pricing models.  They have expressed reluctance to move to an activity-based model up front, fearing that it may to too radical a change for their corporate culture.  I believe it's a mistake not to consider the pricing model as an integral part of the Shared Service design.

When I was a Controller in private industry, I worked for a company that had its Finance & Accounting function centralized at Corporate, but were not part of a Shared Service Organization.  To be fair, this was a long time ago before the concept of Shared Services was really proven.  The problem was that we had a "buffet" pricing model - pay one price and you can go back for as much as you want.  As a result, we were getting endless requests from the business units because it didn't cost them anything to make special requests. 

A Shared Serivces pricing model should properly allocate costs back to those users who generate the most activity.  One pricing model that would accomplish this is a model that provides a core set of services, such as management reporting, for a basic price.  Activities that vary by volume and complexity, such as Accounts Payable or customized reports, would be priced based on volume and time required. 

To be sure, this model is not as simple as a flat rate pricing or one based simply on the FTE's in the business unit, but it is a model that will help generate the right behaviors.  Those business units that are content with the basic services can pay accordingly.  Those business units that generate more activity or have more "one-off" requests can decide if the extra cost is worth it.  By pricing the services of the Shared Service Organization based on volume and complexity, it requires the business units to use its resources and those of the SSO wisely.

Deciding on the Composition of the Shared Services leadership team

When forming a Shared Services Organization (SSO), it's essential to create a governance structure that provides oversight and guidance to the new organization.  Part of that governance structure is the Steering Committee which has overall responsibility for ensuring that the SSO fulfills its mission and is properly funded.

In creating an effective Steering Committee, the composition of that Committee is extremely important.  It's essential that all major stakeholder groups have representation of the Committee.

• Senior customer representatives. From the beginning, an SSO should be a partnership between the SSO and the customers it serves.  This means that the Committee should have senior representatives from the major lines of business.  A good rule of thumb is that if you view the business as a reportable segment for SEC reporting purposes, or if your internal management reports segment the business a particular way, then a senior representative from the operations of that segment should have representation.
• Leaders of key functions in the shared services.  If the SSO focuses on a single discipline such as Finance, than a leader from that group should represent them on the Committee.  It's becoming more prevalent to have a multi-function SSO, so a representative from each group, such as Finance, HR and Procurement should have representation.
• IT.  Whether an SSO is regional or global, IT plays a critical role in supporting the processes of the SSO.  It's essential that IT initiatives support the broader business initiatives.  Representation on the SSO Steering Committee will enable tight integration between the evolution of the SSO and its ability to support that evolution with existing and future IT investments.

Through all of this, the representatives on the Committee must have the organizational and moral authority to lead the SSO and to ensure that it is properly funded and staffed.  When this occurs, the SSO will have the governance structure needed to fulfill its mission and to continue adding value throughout its existence.

Managing Shared Services and BPO through Metrics

One of the cultural shifts that occurs when moving processes to a captive Shared Service Organization or to a 3rd party outsourcing relationship is that managers must reinvent themselves to manage effectively in the new environment.  In a traditional environment, a Finance manager has a number of people under his or her direct control.  They typically reside in the same geographic area, if not the same actual building or floor.  In this environment, a manager can speak directly with their people, receive immediate verbal feedback and read their body language.  All of these inputs feed into the manager's evaluation process to determine if organizational and process goals are being met. 

An organization with a captive SSO or 3rd party outsourcing relationship must learn to manage differently if they are to be effective in governing that relationship.  No longer can they manage by the old rules.  Gone are the days when a manager can "manage by walking about".  There is much less in the way of verbal feedback and non-verbal cues.  In its place, a manager must learn to monitor and analyze metrics to manage processes. 

An effective governance model for shared services or business process outsourcing relationship will incorporate a feedback system that enables the effective monitoring of processes.  These metrics will be focus on both the effectiveness and efficiency of the process.  Of course, these metrics will be tied to the metrics defined up front and embedded into the service level agreement.  The manager's job is now focused much more on the analysis of data and root cause analysis to understand how successfully the organization is executing those processes.

This change does not come easily for many managers.  They have succeeded in their careers because they became very adept at managing by the traditional rules.  As the organizational structure shifts from one of hierarchy to one of influence, a number of the managers may not effectively make the transition.  As part of the change management process, organizations must educate and train managers in the new realities of managing.   They must also provide the monitoring tools and data necessary to successfully manage in the new environment.

Business unit accountability: Process Governance

I've previously discussed the need for the Business Units to partner with Shared Services in creating the Finance organization that delivers services effectively and with a competitive cost structure.  One way to do that is to participate in process governance.

Process governance is focused on creating and sustaining end-to-end processes that are highly efficient while meeting the needs of the Business Units.  It involves the active representation of the Business Units in Process Councils to ensure that their requirements are understood and met.

Process Councils accomplish the following:

1. Establish standard processes and handoffs between the Business Units and the Shared Service Organization.  One challenge in organization is the tendency to view activities in silos, such as Finance and Procurement.  Highly efficient processes transcend this silo mentality and are designed as fully integrated, end-to-end processes.  This involves crossing over artificial organizational boundaries to create highly efficient processes.  A Process Council with the appropriate representation can help break down these organizational barriers.
2. Identify and solve issues that arise at the process level.  Issues will inevitably arise in the execution of services to the Business Units.  The Process Council is a forum where Business Unit representations can bring their concerns and have them addressed.  For this to be effective, the Business Units need a mechanism in place to ensure that issues identified in the day-to-day operations are brought to the attention of the Process Council representative.
3. Stay apprised of emerging best practices within the process sphere.  The representatives to the Process Council should be informed and aware of changes in their industry and the emerging best practices for the processes under their stewardship.  These ideas should be discussed during meetings to identify the initiatives that should be given the green light.
4. Identify initiatives and set priorities.  The Process Council will have the opportunity to discuss a variety of initiatives that could be conducted to enhance the service delivery capabilities of the Shared Service Organization.  It will be up to the Process Council to identify these initiatives and to order these priorities to support the vision of the SSO.  Process Council representatives should have a good understanding of the major corporate initiatives and how their proposed initiatives would support and interact with these broader initiatives.  Process Council representatives should also be prepared to give input into any business case that would need to be developed as part of the initiative approval process.
5. Oversee the implementation of new activities.  The Finance organization and their partners in the business units should always be looking for new ways to optimize processes.  This could involve bringing new activities into a captive Shared Service Center or it could mean outsourcing part or all of that process.  The Process Council and its members have a responsibility to make this determination on an on-going basis and to oversee the execution of these initiatives to ensure they deliver the anticipated business value.

By participating in Process Councils, Business Units can be properly represented in the on-going effort to optimize the processes delivered to their organization.  This shouldn't be optional for the Business Units.  It is essential that appropriate representatives be assigned to the governance process to ensure representation and accountability of the Business Units.

HP's Lessons Learned on the road to Shared Services for Finance & Accounting

Sourcingmag.com has an interesting case study from Les Mara, the head of HP BPO in EMEA.  In the article he discusses HP's journey in Shared Services, the benefits and the lessons learned.  Below is an excerpt from the article showing the "lessons learned"  that I thought was particularly relevant: 

1. Understand why you are pursuing a shared services/outsourcing model -- It's important to develop a compelling business case for moving to a shared services/outsourcing model. Whether it's to reduce finance transaction processing costs or to increase operational efficiency, a company needs to have a clear idea of what a shared services and/or outsourcing operation will do for them.
2. Secure buy-off from stakeholders -- The shared services/outsourcing concept cannot be imposed upon the business units. Leadership within the company must obtain buy-off from the individual units. It takes an investment in governance and stakeholder sponsorship in order for shared services or outsourcing to succeed.
3. Anticipate change -- This also brings about an organizational change, therefore leaders need to develop a clear communication plan targeted at the various stakeholder groups. This allows the company to anticipate and manage risks proactively.
4. Invest in training and recruitment -- Roles and responsibilities change in this new model. Companies need to invest in training and recruitment of team members on the internal resources for their new shared services or outsourcing responsibilities.
5. It's a continuous journey -- Shared services/outsourcing is not a journey with a beginning and an end. This is a continual process and HP is still on this journey and reaping the benefits along the way.

Note how the five points focus strongly on the human element.  While there are a number of factors that go into creating a successful Shared Service Organization, little of it will matter if change management is overlooked.  The extent to which key stakeholders and the organization's employees embrace the move to Shared Services will largely determine how quickly and successfully the business case for Shared Services is achieved.

Here's the full article:  HP's Journey to Shared Services Finance & Accounting Success

Where should the Shared Service Organization reside in a company?

A common question that I get in my consulting work revolves around the governance structure of Shared Services, specifically the issue of organizational reporting and accountability for the Shared Service Organization.  Essentially it boils down to: To whom should the Shared Service Organization (SSO) report?

The answer isn't as clear cut as it once was.  Companies continue to leverage their investment and knowledge in Shared Service to migrate additional services to the SSO.  And many of these functions and activities are outside of the traditional domains of Finance, IT and HR.  If an SSO handles a large number of operational activities, say direct materials purchasing and transportation scheduling, it might make sense to have the SSO report to the COO.

For the purpose of this post, however, I'll cover an SSO that focuses on the traditional functions of Finance, IT and HR.  In this case, the question is still relevant.  What is the right level within the organization and to whom should the SSO report?  I'll come right out and say that I believe it should be the CFO.  Not every company agrees.  I've had clients where the SSO reported to a lower position, such as a Corporate Controller or the Chief Accounting Officer.  The argument, either made explicitly or implicitly, is that the SSO primarily handles transactional, and tactical, activities such as accounts payable processing.

While I wouldn't argue that A/P processing is strategic in nature, I believe that argument misses the bigger point that how a company chooses to deliver services domestically and globally is a much more strategic decision. A comprehensive strategy that addresses global delivery capabilities and that aligns with corporate strategy is very much a concern of the CFO.  For that reason, the Director of the Shared Service Organization should report to the CFO.  Add to the fact that in many organizations the CFO has direct responsibility over IT and other administrative functions, and it makes sense that the CFO is the logical choice to oversee a company's Shared Services Organization.

Should a Shared Service Organization price its services to make a profit?

When setting up a new Shared Service Center or optimizing an existing one, the pricing model is a critical component.  The pricing of services impacts the behavior of both the Shared Service Center and the Business Units, and can ultimately impact the pricing of goods and services produced in the Business Units.  A question that sometimes comes up is: "Should our Shared Service Center price to break even or should we attempt to become a profit center?"

Before I answer that question, let's look at some of the potential pricing models:

1. Centralization of services without cost charged back to the Business Units.  This is the most basic model and is often employed by companies just starting on the journey to Shared Services.  There will be a move to centralize support services in the corporate group.  This centralized support group doesn't have a separate identify or a separate budget.  Consequently, its costs are simply part of the broader corporate organization.  Perhaps the costs are ultimately allocated back as part of a corporate allocation, but the costs of the service organization itself are not directly allocated back to the Business Units.  Consequently, no signal is sent to the Business Units about the true cost of the services they're consuming.
2. Cost allocated back based on fixed price.  Among the charge-back models, this one is the simplest.  An estimate of volume is made and a price is set based on that estimate.  This pricing mechanism can be update annually as part of the annual budgeting process or more frequently if desired.  At a minimum, it sends the message to the Business Units that they are in fact paying for these services, but ultimately it isn't based on actual volume.  Consequently, the B.U.s won't have a vested interest in reducing its consumption of services or partnering with the SSC to optimize processes and reduce costs.
3. Cost allocated back based actual volume (e.g. invoices processed).  This model charges back costs based on an activity drivers so that the Business Units creating the most volume and consuming the more complex processes will pay more for their services.  Only the actual cost is charged back and no profit margin is built in.  The SSC acts as a true cost center without a profit motive.
4. Cost plus a profit margin charged back based on actual volume. This model is similar to the one above but adds in a pre-determined profit margin.  The SSC acts as a profit center; however, it only sells its services internally and does not attempt to sell its services to customers outside the organization. 
5. Market-based pricing model.  In the market pricing model, services are priced to reflect the actual value of the services in the open market.  If you think of the Business Units "outsourcing" their support services to an separate entity, the choice is between a captive service unit providing those services or an independent organization providing them.  In effect, the captive unit and the independent supplier are competitors.  The market pricing model reflects that reality.  Ultimately, if a captive service organization can't provide the services at or near market, the company should consider outsourcing that service to an outside party that may specialize in the process (e.g. Payroll) and has the ability to perform more efficiently than the captive service center.

The two models that should be considered are the cost model and the market pricing model. Companies often choose a captive model over outsourcing because they believe they can provide those services more cheaply than an outsourcing arrangement over the long haul (initial costs are a separate discussion).  This lower cost will provide an additional advantage to the Business Units as they price their own goods and services for the external market. 

Market pricing can make sense, particularly if the company intends to sell to external customers.  Genpact, the former captive GE service unit, it a good example of a previous captive that became its own business.  If the SSC has become so efficient that it can price at market and still make a profit, it doesn't distort the Business Unit pricing mechanism since they would have to pay that market price regardless of whether that service was bought from an captive service unit or an independent company.

While both the cost model and the market pricing model have their roles in a company's overall strategy, one this is clear:  A captive service unit shouldn't pursue a profit strategy at the expense of the Business Units it supports.

Business unit accountability: Partner in continuous improvement initiatives

As the Business Units engage in the Shared Service Organization (SSO) and gain experience with the new model, they're in a position to give feedback to the SSO.  One way they can do this is through the formal Shared Service governance process.  Representatives of the Business Units can work with their counterparts in the SSO and in Corporate to further refine the quality and timeliness of the service delivery as well as expand the delivery capabilities of the SSO.  The feedback that Business Units are giving the SSO can feed into the continuous improvement efforts.

Here are some of the issues that can be the focus of continuous improvement efforts:

1. Process maturity.  Processes can always be made more efficient.  What is the current error rate compared to best-in-class companies?  How effective is the service delivery in cycle time?  What additional activities within these processes can be moved into the Shared Service Organization to create additional economies of scale? 
2. Technology maturity.  What are the current efforts to further optimize the supporting technology?  Are there multiple instances of the same software that can be consolidated.  Are there any manual inputs that can be automated with interfaces?  Are there data extracts that can be automated?  Can any activities be moved from the Shared Service Organization to a self-service model for customers, suppliers and employees?
3. Organizational maturity.  Are there still resources in the Business Units that can be moved to Shared Services?  Are there Business Units who are still out on their own and could be brought into the SSO?  What are the current skills sets of the SSO employees?  Can they be improved with additional training or job rotations? Do the policies and procedures of the organization reflect the current business environment?
4. Information maturity.  What's the quality of information currently being delivered?  How about the level of granularity?  Is your company's management information mostly financial and historical in nature?  Or are you producing rich operational data that provides a forward look into the operations?  Is the current delivery mechanism electronic or paper?  Does information get pushed onto end-users or does the technology enable end-users to pull their own data when they need it?

By focusing on process, technology, organizational and information maturity, the Business Units and the SSO can work together on their journey to high performance.

Business unit accountability: Provide timely and accurate feedback on performance

As business units capture performance data on the company's Shared Service Organization (SSO), they'll be able to provide timely and accurate feedback on performance.  I previously covered the collection of performance data in this post.  What are the correct forums to provide feedback?

1. Informal feedback.  There should be a good working relationship between the SSO and the Business Units.  In the ordinary course of business there are opportunities to address specific issues and identify solutions.  And remember, timely and accurate feedback is not only about problems.  Try to catch people doing something right and let them know.  Positive feedback and encouragement can go a long way.
2. Process councils.  As part of the governance structure, there should be periodic meetings (typically quarterly) to discuss the effectiveness of a process (i.e. procure-to-pay).  A written report of the activity that quarter and the related performance metrics should be reviewed and discussed.  Any deficiencies in the delivery of that service relative to the Service Level Agreement should be covered.  An actionable plan to address the deficiencies should be developed and assigned to specific individuals.
3. Advisory council.  Consists of representatives of the Business Units, Shared Services, Finance and IT.  Used to discuss high-level issues that are not process specific.  As with the process councils, the Advisory should review a written report that covers the quarterly performance of the Shared Service Centers and identifies any issues that requires remediation.

Business unit accountability: Monitor performance of the Shared Service Organization

In establishing a partnership between the Shared Service Organization (SSO) and the Business Units, the Business Units have the responsibility to monitor the performance of the SSO and provide timely and accurate feedback regarding expected delivery levels.  In my consulting work I sometimes hear Business Units complain that the SSO is not living up to its commitments, but when I ask for the data to support their argument they typically don't have any.  Mostly it's a "gut feel" that the SSO isn't doing what the Business Units want.  If the Business Units are going to live up to their end of the bargain, they need hard data to support their conclusions.

Here are four metrics that the Business Units, and the SSO, should be monitoring:

1. Effectiveness of delivery (i.e. cycle times).  Is the SSO actually delivering the services outlined in the Service Level Agreement (SLA)?  How quickly are they delivering?  Does the quality of the services meet the SLA metrics?
2. Cost of services.  Is the SSO achieving the cost reductions outlined in the business case?  Are costs being allocated back to the Business Units based on the agreed upon cost drivers?
3. Response time to service disputes. Issues inevitably arise in any partnership.  How easy is it to get in touch with the right person at the SSO?  How well is the SSO responding to disagreements?  Is the right level of management at the SSO engaged in the issue as appropriate? 
4. Quality of issue resolution.  It's one thing for the SSO to "check the box" and say that they've responded to a Business Unit concern.  It's another thing to ensure that the issue has been resolved to the satisfaction of the Business Unit.  Is the SSO committed to ensuring that they have a satisfied customer/partner?  And for the SSO, is the issue and resolution being archived in a knowledge repository so that it can be leveraged for future disputes?

By focusing on these four areas of SSO performance, Business Units can gather the information they need to evaluate the delivery performance of the Shared Service Organization.

Business unit accountability: Partcipate in the governance framework

An essential component of business unit accountability is the governance process created as part of the shared services operating model.  The governance arrangement enables the business units and the Shared Services Organizations to jointly decide on the scope of services to be offered by the SSO and the manner in which those services will be delivered.

By participating in the governance of the Shared Service Organization, the Business Units accomplish the following:

1. Ensures that the mission of the Shared Service Organization remains consistent with the company's overall strategy,
2. Establishes agreements between the Shared Service Organization and the Business Units regarding the operation of the Centers and the delivery of services,
3. Clearly establishes the roles and responsibilities of each party, so that misunderstandings between the parties are minimized,
4. Participates in discussions to improve existing services,
5. Participates in discussions on expanding delivery capabilities of the SSO,
6. Resolves any high-level issues that can't be resolved at a lower level.

By establishing a formal governance framework early in the process of developing a Shared Service Organization, transparency and trust can be developed.  This trust will be necessary if the Shared Service Organization is to effectively perform its mission to deliver high quality services to the Business Units.

Business unit accountability: Establish clear expectations up front

Setting expectations early on is critical for a successful transition of Finance processes from the Business Units to a Shared Service Center.  These expectations should be spelled out in a Service Level Agreement (SLA).  The SLA is not necessarily a legal agreement between the Business Units and the SSC, but rather a written understanding of the rights and responsibilities of each party.  The goals of the SLA are as follows:

1. Set expectations between the Business Units and the Shared Service Center
2. Enable performance monitoring
3. Provide a pricing mechanism for services
4. Provide an escalation path for issues
5. Allow parties to modify as needs change

Listed below are the major components of a Service Level Agreement: 

1. Processes and services provided
2. Key performance commitments
3. Key process and performance measures
4. Transaction volumes and process activity 
5. Service pricing and billing approach 
6. Dispute resolution and escalation clause
7. Roles and responsibilities of each party during transition
8. Roles and responsibilities of each party ongoing
9. Provision for scope changes and renewal

By creating a Service Level Agreement that clearly spells out the rights and responsibilities of each party, the Business Units can remain engaged with the processes rather than turning them over and absolving themselves of any responsibility.  The challenge is making the agreement specific and firm enough to provide clarity but flexible enough that it can be modified as the needs and capabilities of the parties changes over time.

Keeping business units accountable

One of the challenges of moving activities out of the business units and into a Shared Service Organization (SSO) is that the business units sometimes lose a sense of accountability.  They decide that they want to "wash their hands" of the processes since another group is handling them.  The truth is that business units need to manage the relationship with the SSO using many of the same techniques they would use with an outside service provider.  Of course, the relationship isn't exactly the same but many of the same principles apply.

So, what should business units do to stay accountable to the process?

1. Establish clear expectations up front,
2. Particpate in the governance framework,
3. Monitor performance based on expectations,
4. Provide timely and accurate feedback on performance,
5. Partner in continuous improvement initiatives.I

In future posts I'll discuss each of these points in greater detail.

Appointing a lead for the Shared Service Center

In a previous post I referred to a Shared Services and Outsourcing Network article on the Top 10 Mistakes When Implementating a Shared Service Center.  I wanted to add my thoughts around the issue of appointing a lead or "head honcho" for the Center early on.  It certainly makes sense to hire a dedicated Director for the Shared Service Center early on in the process.  Doing so has a number of benefits that are as follows:

1. Dedicated management.  A dedicated lead will devote 100% of his or her time to the task of developing the Shared Service Center.  This involves everything from ensuring a smooth build out of the facility to facilitating a smooth transition.
2. Personnel recruitment.  Ideally the Director will be able to choose their own team.  This can only occur if the hire is made early on.  The alternative is to let a manager who is not the permanent head of the Center to recruit individuals and then the permanent Director ends up leading a team they didn't choose.  This is not a recipe for success.
3. Training oversight.  Once a team is on-board, a permanent Director of the Center can ensure that their team receives the proper training.  For off-shore locations, this can also include language training as well as training around the specific functions and activities handled by the Center.
4. Process design.  An early hire ensures that the Director at least has a hand in the design of processes to be handled by the Center.  Sure there will be the functional experts and potentially outside consultants to handle the details, but the Director should be involved at a high level in the way the processes will be handled.
5. Transition support.  If a Director is hired up front, they have the big picture and can work to ensure that as technology is configured and processes are tested, that there can be a relatively smooth transition of the activities from the Business Units to the SSC.  They should also have the ear of the Director of the global Shared Service Organization when they need someone to run interference.

Organizations that are serious about setting up a Shared Service Center will make the hiring of a Center lead a high priority.  By doing so, they significantly increase the chances that they will have a successful deployment of the Center.

Why Shared Services is more than centralization of activities

When thinking about Shared Services, there is often confusion about what it really entails.  Of course, many companies are far down the road of creating and managing a Shared Service Organization (SSO) but others really haven't made the commitment to setting up a true SSO.  They may have gathered an activity such as accounts payable processing from the various business units and centralized them in a single location, typically at the corporate office.

One of the problems with this arrangement is that mere centralization of an activity is not a true Shared Service Center.  In centralization, the activity may be all under one roof, but it implies a bureaucratic mindset where the Business Units have to take what they get, there is no collaboration with the Business Units, there is no incentive for the group (in this case the accounts payable department) to continuously enhance service delivery while reducing cost, and costs are typically allocated back to the Business Units in a manner that has nothing to do with the volume and complexity of the services delivered.

In a true SSO, there is close collaboration between the Business Units and the SSO, the Center has the mindset of competing in the marketplace to deliver services at a competitive price, and there is a focus on continuous improvement to enhance delivery and reduce costs.

I believe it's wise to create a separate identity for the Shared Service Organization.  The most successful SSO's I've seen actually create a separate business unit for the group, so there is no doubt that they are in fact a business supplying services to the customers/partners.  They have their own budget and their own mission statement.  They are held accountable for delivering measurable savings  and delivery improvements year over year.  By creating a separate identity, there should be no confusion that this shift represents mere "centralization" but rather a separate business unit in the business of delivering value to its customers.

Should business units be able to "opt out" of Shared Services?

I'm sometimes asked by clients if it's acceptable to allow Business Units the choice of opting out of Shared Services.  My answer is "No" - with a caveat.

Part of the value proposition of Shared Services is the increased delivery effectiveness of standard processes.  It's difficult to get standard processes when some Business Units are going their own way.  Perhaps more importantly, a Shared Service Center requires scale to push down the per transaction cost.  If only some business units are participating then the potential efficiencies of the Center won't be realized.

But Steve, why should Business Units put up with sub-par performance for a greater cost then they could get in the open market?  The answer is that they shouldn't.  A Shared Service Organization that has been operating for at least three years should be very competitive on cost and delivery effectiveness.  My recommendation is that all business units should be compelled to be serviced by the Shared Service Organization for a set period of time, say three years.  This gives the Center time to integrate the processes and achieve the cost savings outlined in the business case.  If after that period of time the Center is still performing inadequately in some of its processes, a review should be undertaken to determine if the processes are better handled back in the Business Units, or if the process should be outsourced completely.

A newly formed Shared Service Organization legitimately requires time to get up and running, and it needs the full cooperation of the Business Units to achieve its goals.   At times this cooperation will need to be enforced from the top of the organization.  Without the full participation of the Business Units, the Shared Service Organization won't live up to its potential.

Technology support for Shared Services

It is often the case that the creation of a Shared Service organization coexists with the implementation or upgrade of an ERP package.  As the thinking goes, there must be an integrated and cohesive technology architecture before we can obtain value from a Shared Service Center.  While it would be ideal to have a single ERP system for the SSC and the business units it supports, it isn't absolutely necessary and a company could lose the benefits of moving to an SSC while it waits to implement a single system.

Deciding on the number of systems a Shared Service Center can and should accommodate will be different for every company.  It's clear that companies that have high performance focus on a single instance of a global ERP.  And yet a company with three or four different systems, or instances of the same ERP could still make the leap to Shared Services using the existing technology.  By doing so, they'll reap the benefits of scale and, to some extent, process standardization.  There are also intangible benefits such as better recruitment and retention of talent within the Center.

The real challenge comes when there are large disparities in the systems of the various business units.  This typically occurs over time when a company has grown through acquisition, but they didn't make the investment to move each business over to a common system in the period after the acquisition.  If a company finds itself in this situation, it could easily make sense to wait to launch a Shared Service Center until there is a merging of the existing technologies.

Top 10 mistakes when implementing Shared Services

The Shared Services and Outsourcing Network has an interesting article on the top 10 mistakes made when implementing a shared service center.  They are:

1. Not measuring costs or service levels before a move to shared services
2. Not documenting processes and work streams pre-implementation
3. Not appointing a full-time head honcho early in the process
4. Not focusing sufficiently on the transition period
5. Not having a robust project plan clarifying employee resources
6. Fighting the battles of yesterday, not those of tomorrow
7. Becoming bogged down standardizing technology and processes pre-implementation
8. Believing that “it’s already a centralized process: there’s nothing we should do”
9. Having no, or inadequate, risk management or monitoring
10. Omitting the "make versus buy" equation

I'll comment on various aspects of this article in future posts, but for now I'd like to discuss the first point - not measuring costs and service levels prior to the move to shared services.  This is a huge mistake because every business case I've ever seen for Shared Services talks about how much cost savings there will be and how much better the service delivery will be.  Unfortunately, if you don't have baseline performance metrics for the effectiveness and efficiency of your delivery, there's no way anyone will be able to substantiate how much cost was reduced or how much service delivery has improved.

I'm a strong believer in regular baselining of costs and comparing that performance to external data as a benchmarking exercise.  This should be a regular part of your operations, but it should certainly be done in advance of a move to shared services.

The article is long and I've only posted a summary here.  Here's the link for the full article:

Top Ten Mistakes When Implementing Shared Services