Shared Service Centers & Intellectual Capital
Louise Ross: What triggered your study on Shared Service Centers?
Ian Herbert: In the past 20 years there has been a trend for replacing the traditional model of organizing service activities in business divisions with an outsourced model. The argument for outsourcing is that it lets you focus on important core activities and harness the expertise and scale of an organization that is an expert in the things that you aren’t. But there is another alternative that’s relatively neglected: the shared service centre (SSC).
Louise Ross: You’re implying there’s a case to be made against outsourcing?
IH: There’s evidence that some outsourced arrangements fail to achieve their objectives. Railtrack and cleaning services in the NHS are two big examples. Arguably, in those cases the outsourcing decision was prompted by political ideology rather than a consideration of specific local situations. A key issue is the relative power of the providers. They often have greater expertise in negotiating outsourcing contracts than their customers – it’s one of their core competencies. And they have even greater power once the customer has lost the facilities and knowledge they need if they want to take back those services.
Louise Ross: Are the problems with outsourcing mainly confined to handling the relationship with contractors, or do you also have concerns about whether outsourcing itself is inappropriate?
Will Seal: If you look at academic and practitioner literature on supply-chain management, a key issue is how to foster trust in the working relationship between the parties. This requires significant management involvement, but there is unlikely to be the same commitment to outsourced activities that are considered peripheral and below the managerial radar.
Louise Ross: So is a SSC the solution?
WS: Yes, it represents a middle ground between the traditional model and outsourcing. It’s a hybrid that allows divisional business units to focus on their core activities while also allowing the wider organization to retain control of services and avoid the significant burden of negotiating and monitoring external contracts. A further advantage of this in-house approach is that such "peripheral" activities often turn out to be more significant than expected. Consider the current debate over whether hospital cleaning is a low-level, peripheral task that’s ideal for outsourcing or an integral part of healthcare with implications for protection against infections such as MRSA.
Louise Ross: Can you talk about cost advantages?
WS: Cost savings are often the main reason behind a decision to establish a SSC. Barbara Quinn et al1 suggest that "easy" cost savings of 20 to 30 per cent should result from SSCs, with further reductions possible as the center is threatened with a move offshore. Cost was certainly the main motivation behind the two SSCs we covered in our research, but the actual savings were harder to substantiate.
Louise Ross: Why was that?
WS: There were a number of factors, some acknowledged by our interviewees and others that were less clear and had to be teased out. The following picture emerged:
- There was an element of jumping on a bandwagon – a feeling that other companies are doing it, so there must be benefits. Paul DiMaggio and Walter Powell2 coined the term "mimetic isomorphism" to describe the process of imitation through which firms tend to become more similar to each other over time.
- The organization seeks to exploit lower labor costs in new locations, which can make a big difference if the original site is in an expensive area such as central London.
- There is often no benchmark against which to assess the SSC proposal. The divisional business units are unable to prove that they are performing, or could perform, those functions cheaper than a SSC. Obviously this view is politically loaded, as the case for the SSC might include forecasts of cost savings through business process re-engineering (BPR), which may not materialize. The divisions may not have access to detailed forecasts for the SSC, or are unable to challenge the figures, since the SSC will combine operations from several divisions, making it hard to compare against any single one.
- There can be efficiency savings from BPR and improvements in performance against service levels. The companies in our study benefited from these, although they were only incremental and arose after the SSC had been established. It was hard to make comparisons with former divisional costs because of the fragmented nature of these peripheral activities within the divisions.
- As well as evolutionary improvements to processes, there are also opportunities to make bigger changes to activities and attitudes. With the inception of the SSC, a more radical, zero-based approach can be taken to defining customer needs – internal and external – and setting appropriate services levels once the activity is physically untangled from the politics and personalities in the divisions.
Louise Ross: What activities were your case-study SSCs performing?
IH: The first, in a media group, consolidated accounting services across a number of regional subsidiaries that had enjoyed significant autonomy. Initially, this was at the transaction processing and accounts preparation level, which allowed the firm to reduce the number of support staff in the subsidiaries, while retaining individual FDs. Later, the SSC’s remit was extended into higher-level accounting services involving decision support to divisional managers.
The SSC in the second company provided IT desktop, HR management, purchasing and accounting services to four substantial operating divisions. This SSC was large, eventually employing hundreds of people.
Louise Ross: You mentioned that organizations risk losing expertise in activities that are outsourced. Is this an advantage of SSCs?
IH: It was certainly a key issue for our second case-study firm. Over the four years of our research, we identified that what defined this company was its ability to plan and monitor myriad engineering activities. The core activities that were once at its spiritual heart had become sufficiently standardized and commoditized that a combination of in-house, outsourced and freelance workers can do them to industry standards. Engineering was still important, but any qualified person could do it – it was no longer a "black box".
This meant that a core competency of the company was now managing a bundle of engineering projects, while support activities such as purchasing, billing, cost analysis, debt collection and so on were enabled by the SSC. Although the SSC was a back-office function, it was not seen as a peripheral activity – it contributed to the firm’s intellectual property. The SSC differentiated the company from the independent contractors and contingent workers who could do the engineering work only on a much smaller scale because they didn’t have the central administration and project management skills to maintain the infrastructure, manage the business and deal with the regulator. The organization accumulated expertise by centralizing project management activities around the SSC, and it would have thrown away a significant competitive advantage if it had lost this knowledge by outsourcing those functions.
Louise Ross: So do you believe that a SSC is key to an organization’s overall knowledge management strategy?
WS: We wouldn’t go quite that far, but it is useful to think of its role in the context of the organization as a whole. That’s what we’re adding to the literature on SSCs. We’re developing the existing work of Sharon Matusik and Charles Hill3 to show how a SSC can play a key role in developing and protecting system-wide knowledge – the sort of knowledge that’s embedded in the architecture of the organization.
Louise Ross: Lastly, does your research have a central message for practitioners?
IH: Think about the possibilities of a SSC. It is unfair that SSCs are less popular than outsourcing, since we believe that SSCs have considerable advantages in terms of retaining and protecting valuable expertise. For many companies, such as the subject of our second case study, that expertise is critical to its competitive advantage.
Professor Will Seal and Ian Herbert FCMA are based at Loughborough University Business School and share research interests in the future of finance and shared service centers. If you would like a copy of their research paper or have any other queries on this topic, please e-mail firstname.lastname@example.org or check out the following website - http://www.lboro.ac.uk/departments/bs/.
This interview is sponosred by CIMA General CharitableTrust. For more information, please check out www.cimaglobal.com