Q: So when is "Shared Services" not really "Shared Services"?
The answer seems obvious, but the question is a critical one, especially when considering what goes wrong when a shared services operation fails. Not every implementation is a success. So, what characterizes a poor implementation, and what are the signs that one should look out for in a failing shared services operation? In particular:
- What are the danger signs of a failing shared services operation?
- What are the root causes of a failing shared services operation?
- How can this be turned around?
Before we start, and as a backdrop to the discussion, there are basically three definitions/descriptions of shared services:
- An organizational definition: shared services is the organization that provides non-core services to the business, employing a specialist team, geographically unconstrained, and focusing on the requirements of the customer. This involves a philosophy and approach totally unlike traditional corporate-driven centralization.
- The goal of shared services: to provide high quality, non-core services (which can include both repetitive common processes and more specialized professional services) to the business at lower cost and more efficiently than the business could otherwise provide for itself.
- How shared services achieves its goals: shared services achieves cost savings and higher quality of service by leveraging economies of scale, organizational realignment, core technology, standardized processes, best practice and end-to-end process re-engineering.
A failing shared services operation will, simply put, not provide the high quality services it should to the business in a cost effective, customer-centric fashion; it will not exhibit the best-in-class attributes of successful shared services operations such as leveraging standardized processes and core technology; and it will not run with an energetic, highly motivated team.
What Are the Danger Signs of a Failing Shared Services Operation?
Some of the possible warning signs include:
#1 - The general absence of a service orientated way of operating
Generally speaking, an internally focused and defensive shared services organization is a good sign that things are not right. Defensiveness often comes from being unsure of one's own position and can emanate from repeated criticism that cannot be addressed effectively. Further, an organization that is internally focused is, by its very modus operandi, not operating as an external, customer-focused shared services operation.
#2 - High staff turnover and low morale
Some level of turnover, usually around 5% to 10% per annum, can actually be advantageous to a healthy shared services operation, but much more than 10% and anything over 20% is likely to be a clear sign of a dysfunctional shared services operation. Having said this, high staff turnover can be linked to rapidly rising wage levels associated with demand outstripping supply, especially in the booming Business Process Outsourcing arena, so one does always need to understand the underlying factors. Nevertheless, if you are experiencing high staff turnover this is a warning sign that must be looked into.
Poor morale is also a clear warning sign that something is wrong. Employee satisfaction surveys are a good way of uncovering this formally, but one can usually sense low morale even without such surveys.
#3 - No structured communication plan with customers
In a failing shared services operation, interaction and communication with customers tends to be reactive. There also tends to be no clear communication plan or clear "customer account management". Examples of effective customer communication exhibited by successful shared services operations include:
- Customer forums
- Customer satisfaction surveys
- Customer feedback loops, both formal and informal
- Workshops held between the shared services center and its customers to improve processes, eliminate non-value add, and reduce chargebacks though cost efficiencies
#4 - Service Level Agreements not in place or not conformed to
Well researched and written Service Level Agreements (SLAs) are very important to the success of a shared services operation. They do not, and should not, need to be huge documents with complex algorithms, but should be practical, easy to understand and "fit-for-purpose". Internal SLAs, for example, do not necessarily need to be as detailed as an SLA with a third-party outsourcer.
A lack of SLAs, a lack of updated SLAs, or a lack of relevance and use of SLAs that have previously been put in place, are all warning signs of a shared services operation that is in danger of failing, or has already started to fail, to meet its goals.
#5 - A lack of standardized process
This can be characterized by some or all of the following:
- Numerous exceptions and out-of-cycle processes
- Lack of clear and standard desktop procedures
- A lot of "noise" in day-to-day processing
- No clear process owners
#6 - Negative customer relationships
This is often accompanied by a "blame culture" and a lack of trust between teams and functions. Examples include:
- The predominance of shadow organizations
- Duplication of work effort
- Multiple depositories of the same data
- "Checking the checker"
- A feeling of "them" and "us"
- Frequent escalations of issues rather than resolution at the point of initial ownership.
#7 - Minimal use of automation tools
Examples of automation tools that could be used include:
- Standard Enterprise Resource Planning (ERP) tools
- Interactive Voice Response (IVR) and callrouting
- Document scanning, workflow and archiving
- Automated banking and reconciliation tools
- Automated procurement and goods receipt tools
- Self-service technology
A lack of use of such tools shows itself in predominantly manual processes, paperwork all over the place, unintended delays in payments to suppliers, longer timeframe to collect cash from customers, poor response to customer helpdesk calls, higher costs per transaction processed, weaker control environment, etc.… and while the lack of such automation tools does not on its own signify a failing shared services operation, their absence makes it far harder to improve service levels and reduce cost per transaction.
#8 - Poor leadership and line management
It could be that there are individuals in shared services leadership positions who do not understand what it really takes to operate and lead a shared services team. Without leaders who really know what they want and how to get there and have the ability, experience and drive to achieve success, it is very difficult to attain shared services’ full potential. Look closely at your leaders and line managers and ask yourself if you have the right people in the right roles.
#9 - High cost of operation
Finally, failing shared services operations have a high cost of operation, as measured by cost per transaction, cost of re-work, fully loaded cost per head, etc. Furthermore, there are often significant indirect costs such as: the cost of shadow operations; opportunity costs to the business resulting from missed opportunities or lack of early warning systems (due to poor data integrity and lack of effective reporting systems); cost of missed discounts; loss of external customers due to a poor service experience (e.g. as perhaps experienced through a call with the customer helpdesk); etc..
There are many benchmarks against which a shared services operation can measure itself, including its own historical performance, its peers, and the wider industry. Of course, an operation can also carry out more detailed benchmarking of its own in consultation with a third party benchmarking specialist. This can be useful when pulling together the business case and helps to understand the situation today so that future performance can be measured against it.
What are the Root Causes of a Failing Shared Services Operation?
Now that we have understood the signs, let's look at why shared services operations can and do fail. This really is the "million dollar" question. The simple answer is that the shared services initiative has not been implemented properly in line with best practice. The actual answer will be more complicated than this because there can be quite a number of contributory factors, not least of which is the understanding and motivation of the company/organization itself.
Root Cause #1 - A lack of senior level sponsorship and support
This is often and quite correctly cited as a critical success factor to any shared services or BPO initiative, or indeed to any significant change initiative that cuts across people, functions, organizations and locations. Without this, the shared services practitioner will often find him/herself isolated and fighting internal battles rather than acting as chief project sponsor on the ground. When disputes do arise, the project lead will not be buffered by a more senior champion, so progress can be slowed, frustration sets in and, ultimately, the project could fail.
Champions of shared services and BPO initiatives need to be active and vocal in their support. Sometimes senior executives provide "lip service" sponsorship only. While this is perhaps better than no sponsorship at all (debatable), it can also reflect the executive who wants to hedge his or her bets so as not to upset the business unit heads too much and/or fears being tarred with a failed change initiative. The irony is, of course, that without active senior level support the initiative is far more likely to fail.
Root Cause #2 - "Solutions" vs "quick fixes"
It is really quite amazing to reflect on how far shared services and BPO have come in the last ten years. Many organizations now have some form of shared services or BPO operating, and some have really taken this a very long way. However, ten years ago people were questioning whether it was even possible to: provide shared services for French, German, Italian, Japanese and many other countries' F&A functions outside of their national borders; centralize what was previously locally provided IT support and applications development into one or two locations; outsource customer helpdesks to a third party; etc. Things have come a long way and now it seems that CEOs and CFOs are, quite rightly, questioning the effectiveness and cost efficiency of the full range of non-core services. Just to be clear, "non-core" services covers the support functions of Finance, HR, IT, Legal, Procurement, Real Estate and Site Services, and can also be expanded to cover other support functions such as Marketing, Customer Support, Distribution and Logistics. Unfortunately, this desire to keep pace with emerging opportunities has meant that many organizations now "jump the gun" and don't think things through before acting.
Every move to shared services or BPO needs to be carefully planned and change-managed, while considering the unique requirements of each customer (internal and external), function, region and jurisdiction. You can't just call it "shared services" and hope it becomes so. I have seen organizations that think shared services seems like a good idea (often more cost driven than service level driven) and so have centralized and downsized before the framework and support systems were in place to allow shared services to operate effectively. This is often accompanied by individuals being "promoted" or "assigned" to lead the implementation, or to take the role of Shared Services Manager, without them having the appropriate experience, training and support.
The same rush to implement can, and sometimes does, occur with offshoring and outsourcing. There are examples of companies which assumed that the financial benefits of labor arbitrage could be gained by simply swapping out staff from higher cost locations to lower cost locations, such as India, without considering the following:
- Account management of the lower cost provider
- How to get the information and documentation to the offshore location/outsourcer
- Security and IT issues
- Skill sets of the people to provide the service from the lower cost location
- Language and cultural requirements
- Foreign exchange and cross-border currency movement restrictions
- Political and economic concerns
- The need for tight Service Level Agreements as this is very important when contracting with a third party
- How to ensure continual improvement
- How to remain flexible; the "get out" strategy needs to be thought through up front because things change and business requirements and opportunities move very quickly in the modern economy
- The fact that it is better in the short, medium and longer term to eliminate work than re-locate it
This is absolutely not to say that lower-cost locations, either leveraged internally or through relationships with third parties, should not be pursued as an option - they should; it is just that badly thought through and poorly planned this could cause extreme disruption, unrest and higher costs, and may well have to be unwound at a later date, or be re-implemented.
Research has found that companies can save over U.S.$30,000 per person per annum in labor costs by moving from an existing Western location to an offshore location such as India or the Philippines. However, the "hidden costs" can be significant. Companies can spend between U.S.$8,000 and U.S.$12,000 per seat for additional facilities, telecommunications and technology infrastructure. Add these to costs such as redundancy, lease termination, and internal project costs in determining your overall return on investment. (Source: EquaTerra article in December 2003 issue of Shared Services News).
Root Cause #3 - Company culture
Company culture is critical to the ease with which shared services can be implemented in an organization. This links into senior level sponsorship and support, but is also potentially more wide ranging in impact. So what exactly is "company culture"? An organization's culture is what makes it different and unique from other organizations that basically do the same thing. It is the way things operate on a day-to-day basis ("the way we do things around here") and is determined by things such as:
- The top leadership
- Organizational hierarchy
- Openness to debate and discussion
- Extent of empowerment
- Management by individuals or by committee
- Formality (e.g. in dress code, titles, benefits, office layout, etc.)
Company culture can be conducive to change, fairly neutral or downright obstructive. In many failing shared services operations people on the ground have complained that "it is simply too hard" because there are too many barriers to change. There may be good reasons for this that could potentially be addressed, such as poor leadership or an inadequate communication plan with key stakeholders; but unaddressed, an obstructive culture can result in a failing shared services operation or, at the very least, an operation that does not achieve all it could.
Root Cause #4 - Poor technology roll-out
While technology is not necessarily the most critical success factor, it is a significant enabler. There are many examples of companies having rolled out a "standard" ERP platform but with the scope of the implementation being so limited (inflexible) as to encourage side systems to remain prevalent after implementation; or, perhaps, limited to meeting just Head Office objectives, without trying to capture, understand and take into account local requirements (e.g. local statutory, regulatory and tax accounting, reporting and compliance matters). It is also important to understand each function's needs so that the user is confident that their needs will be met. This may require some changes to the way things are done, but if the need is understood, rather than ignored, it can be incorporated into the implementation plan. This does not mean that every suggestion should be met regardless, but it is important to understand the rationale behind each request. Management reporting of performance is a good example of this. Most ERP platforms do offer management reporting tools to the end user but if access to these is restricted, set up is not effective or training is inadequate, then users "in the field" will have to find alternatives and this means a proliferation of disconnected data repositories and reporting tools, including, of course, the old favorite: the spreadsheet. This necessarily results in a higher cost to produce data, lower data integrity due to multiple sources, reduced trust and a weaker integration of systems and overall control environment.
One danger that needs to be watched for is the third party implementation partner who is working on a limited budget and gets into "tick the box" mode, rather than really understanding the bigger picture. While a clear scope is critical, there needs to be flexibility in how to deliver, and, as situations arise, some flexibility in how to move actual scope as well. More significant scope-related issues can be flagged to the project Steering Committee.
Root Cause #5 - Lack of clear project plan and business case
Any successful value-add change initiative should be resourced, managed and measured effectively against a clear business case. The business case also has the advantage of clearly establishing the current state of affairs in terms of service levels, cost, risks and challenges. This helps to reduce the impact of "perception vs reality" down the track as progress is measured against how things really were, rather than against how some people might like to think things were.
Root Cause # 6 - Lack of employee training and development
I have heard it stated that "training is not a discretionary expense", and I could not agree more. Career progression, development, mentoring, job rotation, etc, are all recognized best practices in high performance organizations, and, of course, the same is true for shared services operations. Training and development not only improves staff morale and retention, it also increases productivity, engenders a culture of innovation and advancement, and promotes the sharing of ideas to improve the performance not only of the individual but of the whole team.
What Can be Done to Turn Around a Previously Failing Shared Services Operation?
So what are some of the keys to successfully turning round a failing shared services operation?
#1 - Senior level executive sponsorship
Make sure that key executives understand and support the roll-out. If such sponsorship is not present then investigate why and determine whether there really is the appetite for shared services. Engage with senior executives and sell the value of shared services to them, either again, or for the first time.
#2- Proper baselining and a key business case
Budgets need to be set and managed. It is easy to spend multi-millions on a poor initiative (especially on technology) if things get out of control, but it is also entirely possible to spend much less and get a much better result. Remember to highlight and track as best you can qualitative as well as quantitative benefits, along with costs. If this was not done in the first place, do it now and start afresh. Use the opportunity to reengage employees and customers by treating this as an exciting and new value-add initiative.
#3 - Do not underestimate the change management required for any such initiative, including a turnaround
Shared services initiatives cause, and require, significant change affecting people, processes and organizations. As this is a turnaround situation one does need to be very careful of openly criticizing people attached to the original implementation, especially as many of the issues faced may well have been outside of their control. Problems need to be addressed, but in a "non-blame" way.
#4 - Carry out regular communication with all relevant stakeholders
Engage users or they will feel pressured and will react against the change.
#5 - Assign your best resources and people to the project
Remember: This is a significant investment and its success will be "mission critical" to the success of your organization, so make sure you give it the best chance. Look closely at existing leaders, project managers, business process owners, third party consultants, etc, and make changes where necessary.
#6 - Training is key
Not just to show users how to work in the new environment and how to use the new tools but to make them feel more comfortable with the new processes, rules and technology. If there wasn't an effective training program in place previously then establish one now.
#7 - An ERP system is an "enterprise" system for use by the business
It is not a technology solution owned, or to be used exclusively, by the IT department. Make sure this is understood by key stakeholders and internal customers, as well as by the implementation team itself.
#8 - Make sure that service delivery requirements are clearly understood
Then map these to the shared services organization and your chosen ERP system's configurable processes. Do not simply replicate current state processes – be requirementsfocused and stick to best practice.
#9 - Follow the "80/20" rule for shared services ERP when deciding whether to use "vanilla" ERP functionality
If your core ERP can provide you with 80% of the functionality that you require as standard then you should go with this every time. The remaining 20% will either have to be foregone or internal processes adapted to meet the standard functionality offered. As mentioned above, ensure that business requirements are clearly understood.
#10 - Have regular, meaningful Steering Committee meetings of key stakeholders
This should be an active committee and not just a chore to get through unscathed every week. If such a Steering Committee was not in place before, put one in now and make sure that it functions as it should.
#11 - Try to cleanse the data as much as possible before each main cut-over or clean-up
The quality and volume of data should be worked on early in the project and not left to the last minute. Again, if this was not done first time around then it will need attention in the turnaround or re-implementation.
#12 - Engage targeted expert outside help
Neither abdicate responsibility for the project to a third-party consulting firm nor try to do the whole thing "on the cheap". A partnership approach with relevant and expert outside help is the best way to proceed. This may well mean dropping the previous third party used, or working with them this time under a different set of ground rules. But it also may entail actually engaging third-party expert help for the first time.
#13- Make sure your team includes regional and local expertise and be prepared to travel to meet and work with users
Do not think that you can run the whole project from Head Office. Visiting your customers saves them time and proves your commitment to them.
#14- Consider using chargebacks to actively support shared services
For example, penalize users who do not follow standard processes or stick to using non-core ERP systems. If chargebacks were not used first time around then perhaps they could be of help going forward, as long as requirements are clearly understood, agreed and documented in SLAs.
#15 - Remember always that the project does not end with "go live"
There needs to be adequate support post golive and also continual training and retraining. This is a key to success and to the turnaround of a previously failing shared services operation.
#16 - Keep working towards your goals and be relentless in pursuit of them
Shared services initiatives require significant commitment both in terms of resources and in terms of energy. Turnarounds can be very difficult, but can also quickly demonstrate improvement that should be readily recognized by all parties, which helps build up trust and a momentum for continued and significant success.
Implementing shared services is a major change initiative that can derive significant business benefits in terms of reduced costs, better services, improved quality, speed and accuracy of data, and a tighter and more efficient enterprise-wide control environment. However, success is not a given and there are many examples of shared services operations that have either simply failed or have not achieved anything near their full potential. This article will hopefully help shared services champions and practitioners look for the danger signs, identify the root causes and, from there, work out the best ways and methods to turn the situation around.