Shared Services as an Asset in Supporting Innovation and Growth
Shared services have long been seen as a supporting unit for the rest of the business with limited impact outside of the bottom line. Now, however, companies and directors of shared services face mounting pressure to make significant contributions other than to the bottom line. With core transaction processing moving to external service providers, what is the face of shared services as a business partner today?
Increasingly, business-minded shared services leaders are addressing four common questions:
- How does shared services support innovation and growth?
- How do shared services organizations (SSOs) innovate to impact the balance of the enterprise?
- How do you re-define shared services from a transaction focus to a front-line innovator?
- What are the success factors that shared services can adopt to increase innovation?
Growth and innovation, two of the most critical issues facing companies today, are historically, not the chief concerns of staff functions or of shared services. However, shared services’ focus on process management expertise forms a critical tool for cost-effective growth. This process management discipline, leveraged through innovation initiatives, allows companies to overcome shortages of key technical talent and lower product cost curves, and expand into international markets. An effective SSO also attracts and retains top talent that companies need to remain competitive.
Shared Services as a Foundation for Cost-Effective Growth
Wall Street continues to reward companies that demonstrate consistent, profitable revenue growth. Not surprisingly, profitable revenue growth continues to dominate the agenda for CEOs of the world’s largest companies. These CEOs frequently report "sustained and steady growth," more than any other challenge, as their greatest concern. Wall Street applauds aggressive strategies from the executive suite that explore new markets, launch new products, and develop new lines of business. Constant innovation is demanded to maintain and increase shareholder value.
But while innovation is considered the driver of top-line growth, what are executives doing to ensure that their organizations are ready to launch and support this growth? Are staff functions scalable? Can SSOs keep their costs down amid revenue growth? Without the cost-effective scalability provided by shared services, the rapid top-line growth powered by innovation can be dragged down by non-discretionary investments in non-strategic back-office functions.
Leading Companies are Leveraging Offshore Delivery To Increase Competitiveness
Do shared services contribute to profitability only by cutting costs? The Duke University CIBER/Archstone Consulting study1 reveals that Forbes 2000 companies now view the offshoring of business processes, IT, engineering, and R&D activities as a means to drive business growth, not just reduce costs. Of the companies surveyed:
- seventy-three percent responded that offshoring is an important part of their overall growth strategy
- product innovation and design, research and development and engineering services were all cited as key offshoring initiatives
- seventy-one percent cited access to qualified personnel as a major concern when considering offshoring (up from 54% in the last survey)
- China is the fastest growing location driven by manufacturing and product innovation services (up to 12%, from 7% in the last survey).
Why do Companies Offshore Shared Services?
"Taking out cost" is still the most important reason cited (97% of implementations). Surprisingly, 73% of implementations contained offshore components as part of a growth strategy. "Growth strategy" and "access to qualified personnel" are more commonly cited by companies with some existing offshoring experience than by companies considering offshoring in the near future (72% compared to 59% for "access to qualified personnel," and 76% compared to 64% for "growth strategy"). However, companies with no offshoring experience place greater emphasis on redesigning their business processes through an offshoring strategy (71% compared to 42% for companies with prior offshoring experience).
Applying Shared Services Process Management to Innovation
The results of the Archstone Consulting State of Innovation Survey 2006 indicate that many companies reporting high expectations for innovation fail to match these expectations with disciplined and effective process management and strong management metrics and controls. While this may look alarming at first, we believe that it is more likely indicative of a large-scale improvement opportunity for those companies that recognize that their high expectations for innovation investments must be matched with more disciplined management approaches. These companies have a better chance of identifying their capability gaps, and will close these gaps more rapidly than their competitors. Many attributes of process management, such as metrics and controls, are the domain of SSOs – they are the very reason SSOs exist. However, the rigor and tools around measurement and metrics can be applied outside of the traditional transactional scope to broader business process areas. Once considered the realm of business partners, centers of excellence, or even corporate/governance bodies, these business processes are ripe for examination and improvement.
Shared Services Enabling International Expansion
Globalization is often painful, yet the potential gains cause many companies to pursue growth in lucrative overseas markets. Companies acquire operations overseas, grow organically and struggle to compete with dominant domestic competitors. The difficulties and challenges of growth combined with cultural and regional complexities create a natural tension between CEOs and their country managers. A Fortune 20 company we know is facing these issues today: with a strong domestic heritage, its strategy for growth overseas was both organic and by acquisition. A critical requirement for the company was a cohesive and integrated business model organized around customers, rather than countries or regions. To ensure this tight focus on customers, country managers were transitioned into new roles as sales- and marketing leaders, without the country geographic boundary. At the same time, staff function leaders in finance, HR, and IT spearheaded a rapid move towards a limited shared services operation. Driven by the need to meet regulatory requirements, and combined with the implementation of best-inbreed outsourcing, the company transferred the responsibility for administrative and regulatory activities to a central group. The "former" country managers were then able to focus almost exclusively on their markets and customer needs.
What are international leaders doing to support growth overseas? What role can the shared services leader play in supporting growth. Are the "plug-and-play integration" and "focus on core competencies" benefits of shared services and/or outsourcing not applied outside of your domestic market? Implementing a shared services concept or an outsourcing program to support profitable growth should happen before the inefficiencies of the past are institutionalized.
Going Offshore to Overcome the Product Development Talent Shortage
The stories are numerous: companies are increasingly reaching out across the global market to source cost-effective talent. The Duke University CIBER/Archstone Consulting study of over 2,000 companies reveals "access to qualified personnel" has gained significantly in importance since the first survey (54% to 71%). One of the most important new findings of the survey, however, is that "growth strategy" is now more often associated with offshoring product development functions than with administrative functions (81% for R&D, product design and engineering compared to 67% for finance/accounting, HR and other back office services). Follow-up interviews suggest that offshoring actually enables companies to increase their numbers of engineers and researchers while keeping the cost of product development as a percentage of sales constant. Shared services needs to drive not only the transactions and traditional overseas processing, but also increase its scope beyond historic definitions (e.g. finance, HR, IT) and the company’s domestic organization.
Keeping up with Competitor Moves
Right, wrong, or indifferent, shared services has historically been resistant to change. The core business of a leading global consumer packaged goods company shifted from a closed-innovation approach to a product development approach, and then to an open innovation approach, which leveraged outsiders and external experts to commercialize and license different technologies to apply to their products. This move shifted the organization towards joint ventures across commercial operations – and ultimately impacted the staff functions, including the global business services organization. The company’s shared services leaders opened their doors to innovation and partnership with an array of outsourcers in areas ranging from finance to human resources and IT. Shared services leadership thought: "If the business does it, why can’t we?" Evidence suggests that the rest of the consumer packaged goods industry is striving to catch-up with this revolutionary move. If your competition is innovating across its business, then aren’t you taking a risk if you don’t?
Shared Services as Part of Redesigning the Cost Curve
A global manufacturer of automobiles and machinery, with a strong history of lean manufacturing principles, renowned for effective and efficient operations, was looking to re-invent the cost-curve per car. The company was leading most industries in typical metrics of staff function efficiency (cost as a percent of revenue, staff per employee, etc.) for finance, HR and other functions. But instead of "resting on their laurels" as cost-effective today, leadership of the staff functions focused on what they could do to be successful in five to seven years’ time. Their vision was to reduce costs per car in a systematic fashion, in line with operations. By challenging the norms of a historically efficient but "siloed" organization, they explored aggressive consolidation and revised shared services, business process outsourcing and commercialization to achieve their needs. Instead of settling for reducing costs when they were already performing well in that area, they explored the opportunity to drive cost out of the company’s extended supply chain of suppliers and vendors while also providing deeper integration and transparency throughout the supply chain.
To drive the integration further and to add scale, the parent company also explored the cost structures of its investments in other companies. Instead of shrinking the pie further, they analyzed the scale and depth to which they could apply their rigor and skills outside the confines of their own company. The opportunity exists not just to reduce costs inside the company but for the entire supply chain as well.
Is Additional Support for Growth and Innovation through Shared Services Possible?
Competitors are deploying more integrated business models, extending deeper into the supply chain and into customer relations. This shift is accompanied by flexible and scalable SSOs that can adapt to a new scope of responsibilities, even outside the company’s traditional boundaries. Shared services must be a leader in transformation and re-engineering of end-to-end processes. But how can shared services contribute to increasing growth and innovation? Historically, this has not been the remit of staff functions or shared services. Two recent management trends, however, provide an opportunity for shared services to add value proactively: 1) companies are shifting their business models to stay abreast of markets; and 2) business model innovation has the potential to create competitive advantage.
1) Business Model Innovation
Business model innovation is becoming the new strategic differentiator. The business model we choose can determine the success or failure of our strategies. Our survey results indicated that innovation in the enterprise’s business model garnered nearly as much attention as innovation in a company’s core processes and functions. Companies that have grown their operating margins faster than their competitors did so by placing greater emphasis on business model innovation than underperformers. Effective process management is a linchpin to innovation management. Shared services reinvented the internal service delivery model of companies when first adopted. How can shared services now drive a new business model moving forward?
2) Creating Competitive Advantage
Innovation doesn’t need a badge to get in. CEOs said their company’s employees were the most significant source for innovative ideas. But ranking close behind employees were business partners and customers – a key indicator that two out of the three top sources for best ideas now lie outside the enterprise. Collaboration can pay off. CEOs are more eager to partner and engage with other organizations than ever before. Companies with higher shareholder growth reported using external sources significantly more than the slower growers. As one CEO said: "If you think you have all the answers internally, you are wrong."
How can SSOs better leverage their current and potential partners and outsourcing service providers to be successful? Are there sources besides outsourcing providers that can contribute or otherwise inspire? Can shared services succeed as the manager of an extended administrative supply chain with multiple providers as opposed to one? Can shared services reach out to academics and other thought leaders to re-define itself?
The Path Forward
We believe that shared services can innovate and drive fundamental business model change with input from external parties. The increasing collaboration with outsourcing service providers demonstrates that shared services can operate outside the traditional confines of functional and organizational scope. shared services remains a tool for cost-effective growth. The discipline of process management resident in shared services can be leveraged by innovation initiatives. The maturity of offshore service delivery by companies overcomes a shortage of key technical talent in staff function but potentially adds higher value-added core activities, such as research and development.
Shared services have redesigned the cost curve by expanding to the broader supply chain of vendors and customers as their organizational scope. Critical growth overseas, whether organic or by acquisition, requires a scalable and manageable shared services or outsourcing solution. How will shared services build on this potential?