Shared Services and Outsourcing

Scott Furlong
Posted: 07/09/2012

Shared Services Definition

There is a lot of confusion in the marketplace surrounding outsourcing, offshoring and shared services. Pundits and journalists (particularly in election years) often use the word outsourcing when describing the perceived dangers of shifting jobs to low cost countries. Clearly they are describing the practice of offshoring, but end up declaring outsourcing as a new and dangerous trend. Outsourcing has been around for centuries, in fact, Pope Julius II outsourced the painting of the Sistine Chapel ceiling to Michelangelo in 1508.

There is similar confusion surrounding outsourcing and shared services. Many believe the two service delivery models are mutually exclusive in nature. I believe the exact opposite to be true. There are many similarities between outsourcing and shared services. Outsourcing is the act of contracting with a third party to perform some service. Over the last fifteen years, outsourcing for businesses has grown from traditional outsourcing of facilities management (janitorial services, security, cafeterias) to outsourcing more administrative support functions like Information Technology, Finance and Accounting and yes, Human Resources.

In the late 1980s, the term "Shared Services" was coined by a US multinational and defined as the following:

Shared Services is the delivery of those functions or processes that can be delivered to the corporation from a "shared" delivery model. This ‘sharing’ not only leverages the delivery of services across business units, but also represents a ‘sharing’ of accountabilities and responsibilities between the shared services organisation and it’s customers.

What’s interesting about this definition is the lack of the notion of "ownership" anywhere in the definition. It refers to delivery of services to a corporation from a shared delivery model which could just as easily be a third party external to the corporation as an internal organisation.With a well functioning outsourcing model there are several critical success factors associated. They have well defined statements of work (and shared responsibilities); they have well defined service level agreements, governance structures, pricing, and even human resource provisions. All of these success factors are equally important to an internal shared services organisation. The main difference between outsourcing and shared services is that often a shared services organisation will not execute a legal contract between themselves and their customers as they have the same parent company.

Another similarity between outsourcing and shared services is that rarely does either organisation take over all of the processes for a given function. For example, a company outsourcing their Human Resources may have payroll, workforce administration, and recruiting in scope. Clearly there is much more to Human Resources than those processes. The company is retaining compensation administration, benefits administration, HR strategy, labour relations, etc. Sometimes these "retained organisations" are organised themselves as a shared service centre, other times the company will retain these processes in various business units.

I would propose an emerging model entitled Global Business Services (GBS). I define GBS as "controlling the delivery of business support functions to the core business through multiple service delivery models on a truly global basis." There are several key words and concepts in this definition that we will explore in the following paragraphs.

"Controlling the delivery" is the first key concept. GBS is not about being an organisation that delivers all functions, but to operate at peak efficacy for the enterprise, the GBS orgainsation needs to control the delivery of the functions placed in scope. The GBS organization can be the umbrella for several functions and have multiple service delivery models in place in various geographies. Taking HR services as an example, the GBS organisation may elect to have the more transactional processes in Human Resources delivered across the world in a standardised, outsourced model. They may then elect to have additional HR processes delivered through business partnership models whereby regional or country based HR professionals sit with the business leaders and provide service and advice. And lastly, they may develop regional shared service centres to deliver those aspects of HR that have been deemed unsuitable for outsourcing and/or business partnership.

The next concept is that of including all of the business support functions under the charter of GBS. Just as shared services and outsourcing leverage the management expertise across multiple processes and in the case of outsourcing, multiple clients, GBS can leverage management expertise across all support functions within the enterprise. This results in economies of scale for expensive talent and more importantly frees up the management team of a business unit to focus on their core competency. As the number of delivery model alternatives expands, the enterprise is best served by a small team of experts to constantly shift the portfolio of delivery models to take advantage of market dynamics and ensure the portfolio is optimised. This is very difficult to do in a decentralised, fragmented environment.

The last concept is that of multiple delivery models on a truly global basis. We have already touched upon the notion of multiple delivery models for different processes or even geographies. The truly global concept is often misunderstood. A company operating in every region of the world and 150+ countries is not necessarily global. Being global entails having global process owners who ensure the key processes around the world are all done in a standardised manner where possible. Being global means having the ability to shift work and/or employees around the world in the event of a natural disaster or market turbulence. Being global means having visibility into the key metrics and performance measures in every region of the world. Being global ensures that best practices developed in one country or region are quickly leveraged in every other region around the world. Is your company truly global?

If your answer is "No", don’t feel bad; very few companies can even claim they are on the journey. The key message of this article is to start thinking about shared services as an organising principle that can help your company take advantage of different delivery model options such as outsourcing or offshoring. Shared services is not mutually exclusive of outsourcing and in fact makes a perfect home for the governance of a company’s outsourcing relationships.

Scott Furlong
Posted: 07/09/2012

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