A low cost route to Shared Services (Part II)
Part I of this article looked at how 'Program' and 'Process' were important when looking at a low cost route to shared servcies. In Part II, we look at 'Premises' and 'People'.
Much debate has taken place over the years with some strong opinions that a Shared Service Center needs to be in a Greenfield location, picked for its specific suitability and sufficiently detached from the locations of the old, distributed business structure to shake off any historic organisational baggage. A Greenfield site can be chosen with stakeholder consensus based on the best advice and detailed review of suitability. Individual premises can be newly built or refurbished to provide an ideal working environment for the planned SSC operation. But, acquiring, fitting-out and managing a new facility can be a hugely expensive endeavour. A Brownfield site (in this context an existing facility able or adaptable to accommodate the required number of office staff) perhaps doesn’t send the same messages around the organisation that the SSC brings great change for the better nor does it necessarily help establish the concept of a separate operation providing improved administrative service to its internal "clients" (especially if the Brownfield site happens to be the existing regional HQ) but the set-up cost comparison with a totally new facility in a previously untried location could be overwhelmingly compelling.
As we emerge from the worst of recession, many multi-site businesses will have more floor space than they currently need, more than they can anticipate using in at least the medium term and probably more than they can hope to sell, re-let or extricate themselves from in any way that doesn’t carry a high price-tag. Locating an SSC in current excess space may not only resolve a Real Estate issue but will do so with a positive impact on business costs beyond simply effective utilisation of space.
The actual process of selecting a Brownfield site will differ slightly from that of finding a Greenfield location. For the latter, emphasis is usually initially on geographical location, often starting with a blank sheet of paper, whereas the option of using an existing facility may be limited to little if any choice. However, the key selection principal is fundamentally similar in that the need is for somewhere where it is relatively straightforward and cost effective to hire (and fire), employ and manage staff who are capable and motivated to perform the intended tasks to a high standard. This is the essence of an effective Shared Services organisation.
The biggest challenge in choosing an existing facility may be to focus the decision makers on the Shared Service Center requirement rather than the short term gain from solving a property problem. Strong sponsorship of the benefits sought from Shared Services will be put to the test over this issue. Unfortunately, excess office space is logically more likely to be a problem in areas that don’t have much going for them in terms of growth, demand and motivated workforce so this part of the SSC program requirement is likely to need the most flexibility, probably the most compromise and possibly some difficult decisions.
If there is no real choice of Brownfield site or choice is limited to locations that are clearly unsuitable for an SSC, this may be an item where cost cannot be contained at its lowest possible level and an investment in a new facility may be the only answer. For example, an existing facility that needs major refurbishment but is located in a country where suitable staff are scarce and employment legislation heavily disadvantages the employer may be ultimately more detrimental and costly than reverting to a Greenfield location choice. If, however, there are some potentially good existing locations the question is simple – are the right staff readily available at the right cost and is the employment environment favourable? A simple comparison of each potential location based on a few key elements of these criteria should enable the choice. Co-location with a regional HQ or similar operation may give some impression of heavy handed control rather than an internal service oriented culture but it can be very convenient and reduce the amount of additional business travel (enabling visits to the HQ and SSC to be combined). It is also likely that an HQ function has been located in or near a regionally important city, providing the immediate availability of a sizeable multi-cultural, multi-lingual skilled workforce.
In terms of cost saving, a good existing facility may already be suitably fitted out with finished floors, walls and ceilings, light, power and communications connections available to desk spaces. The building itself probably already has connected services, communications and heating/air conditioning. Depending on previous use, there may even be sufficient or a good initial quantity of demountable partitioning, desks and chairs to set up the SSC. Where part of a large existing facility is available, catering, cleaning, maintenance and other support infrastructure may already be in place, operational and able to meet the increased demand. The cost of undertaking and providing all of this from scratch would otherwise be a major component of the overall set up and could add several months to the schedule.
In managing the reduction of the existing workforce, distributed across business units, the key elements are the proportion of staff that leave and the cost of their departure. Obviously, local employment legislation is a significant factor in the cost of the reduction and every precaution needs to be taken to avoid the additional costs of litigation or protracted disputes with unions or other representative bodies. Engaging HR and legal specialists at a local level is almost a prerequisite for this part of the programme.
Establishing the extent of the scope of the Shared Service operation is fundamental in determining how many existing employees are no longer required and at what level. If the SSC scope is confined to very basic transaction processing and/or leaves parts of tasks in the local business units, it may be difficult to reduce local staffing costs, particularly at higher operational and management levels. Whilst this may keep down initial costs of terminations and redundancies, it will not free up sufficient salary savings to enable the realisation of a good ongoing cost benefit from the SSC. It is essential to have sufficient SSC scope to allow the benefit of reduced management in local units. A basic principle of Shared Services is to create a single, relatively flat management structure for a sizeable group of staff in one location as a change from having multiple layers of management duplicated across several business units. Leaving the same managers in place locally but adding an SSC management structure centrally contradicts that principle and will almost certainly result in poor, if any savings.
Having established a potential local workforce reduction that will give sufficient opportunity for ongoing salary cost savings in the SSC, it is possible to look for cost savings in the process of that reduction. As above, any redundancy payments will need to be in line with local legislation and also, in most countries, with precedents set in any previous reductions in workforce. So, any saving in this area needs to come from reducing the number of redundancies whilst still achieving the reduction in workforce. If there is already a suitably skilled workforce in the chosen existing location to start populating the SSC, any transfers of that group from business unit to SSC will save redundancy costs. There is a very limited potential to transfer staff from other business units but the traditionally low take up of relocation opportunities (particularly moving country) and the difficulties of doing so without high relocation costs and transferring inflated salaries, suggests that the best result may be as low as 1% or 2% of the workforce.
Probably the most underused cost saving option is to look at internal transfer of staff from redundant roles into open positions elsewhere in the local organisation. It is essential that such transfers are to genuinely open roles that would otherwise be filled through external recruitment. In companies that have managed to shrink in order to survive recession, a return to relative prosperity may leave a number of holes in the organisation and there could be some very good, experienced people available to fill those gaps. With all the right factors adding together, avoiding redundancies substantially or totally could even be possible.
The second largest cost item in program budgets relating to existing employees may be an amount allocated for "retention". A substantial six or even seven figure sum may be the anticipated total for distribution across existing employees in return for them staying with the company for a given period.
As soon as a Shared Services program is announced or word spreads of its likelihood, there will be an increase in the job search activities of current employees. Almost regardless of the value of any retention incentive, good employees without good accrued redundancy benefits through length of service will actively look for alternative employment and probably leave at the first opportunity. This creates an unavoidable need for temporary staffing anyway and, where a retention scheme is in place, leaves payment going to the people who may have been lower priority to keep for the duration. So, the easiest way to save in this area is to simply avoid starting any retention scheme. Some people will leave earlier than would be preferred but that is part of the challenge of a Shared Services program.
Finally, the key to meeting operational performance and cost requirements in the Shared Service Center is in the recruitment of the SSC staff. Wherever in the world the SSC is to be based, it should be possible to reduce the overall wage cost of performing the tasks allocated to it in comparison with the previously distributed organisation. Unfortunately, it’s also fairly easy to let that slip through missing too many opportunities during the recruitment cycle - a clear and well followed plan is critical to success.
The wage cost savings should come from:
- A significant overall reduction in the number of employees needed to complete the tasks –through streamlined processes, well managed workload and productivity/performance management. The two biggest risks to achieving this are while everybody is getting used to the new operation and a need to clean up some incorrect or incomplete work migrated from the local units. When the staff numbers need to exceed medium to long term plans, it is better to employ temporary staff and review regularly with a view to reducing rather than increasing the permanent contingent in the hope that natural attrition will resolve the issue – it won’t!
- A reduction in the number of managers overseeing each task and a productive hands-on role for most, if not all, managers. The reduction in cost can be significant if the number of managers is cut effectively in the local units. For example a transaction processing operation in 20 business units may have needed 20 managers. An SSC group undertaking the same tasks may need only 1 or 2.
- A different skill level across most employees – SSC staff will work following a pre-determined process whereas many staff in local business units will have adopted their own methods of working based on their level of skills and experience. Similar to the overall reduction in employee numbers, the reduction in required skills and experience can be initially difficult to achieve. Many new SSCs tend to recruit above the necessary skill level and often with language skills and qualifications that are not needed after a while, then struggle to motivate that overqualified staff.
- Salary levels payable when recruiting for the short to medium term. In many areas of an organisation, recruiters look for staff who could become long service employees. Staffing an SSC at an ongoing economic cost requires a continuous turnover of employees to prevent a build up of individual pay reviews distorting the cost of execution of a task. The potential monotony of performing a repetitive process will also generate an amount of staff turnover, which may be viewed positively in terms of creating a regular influx of freshly motivated and enthusiastic new recruits. In consequence, starting salaries may be set to meet the requirements of people early in their careers, maybe needing the experience and possibly only intending to be based in the location for, say, 1 – 3 years.
- A single managed pay structure that, as a major cost item of the service provided to the business units, is under continuous scrutiny from SSC management, executive management and business leaders across the company.
Although a Greenfield site in a low cost area may provide additional salary cost savings, the successful delivery of the above at a Brownfield site may compare favourably when the difficulties of recruitment, local practice, etc., in an unfamiliar location are taken into account.
A well executed Shared Services program can be inexpensive through focus on potential cost savings across the Program, Premises, Processes and People. The cost savings may outweigh any benefits attributable to a much higher program spend – a poorly executed but expensive program will bring much worse results in all areas.
If the only thing preventing a move to Shared Services is cost, a low cost program could remove that obstacle and enable the benefits of Shared Services to be realised even in an economically challenging environment.
Points of Discussion
1. Jim Whitworth, Independent Shared Services Specialist discusses the human resource element of setting up a low cost Shared Services. Various options on how to manage the staff migration are discussed in the article. Does anyone have any additional strategies or options they could share?
2. Greenfield vs Brownfield locations - which is the right option for your Shared Services? Much debate has taken place over the years with some strong opinions that a Shared Service Center needs to be in a Greenfield location, picked for its specific suitability and sufficiently detached from the locations of the old, distributed business structure to shake off any historic organisational baggage - Do you agree or disagree?
Jim Whitworth built CA’s EMEA Sales Accounting SSC in the late ‘90s using available space in their EHQ and existing IT infrastructure , moving over 70 jobs out of the distributed organization without any compulsory redundancies. He has subsequently developed worldwide shared service strategies and now works as an independent consultant providing hands-on management support for shared services programmes in both the technology and manufacturing sectors. Jim has worked on programmes located in Western and Eastern Europe, including managing projects for Hitachi Data Systems and TRW Automotive.