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2015 NDMA Inc.

NDMA Inc.: SHARED SERVICES

SHARED SERVICES
establishing a competitive business within a business

What's beneath all the buzz about shared services?

While working with the IT leadership of a large services company, I found everyone enthusiastic about the concept of shared services. Mary, the corporate CIO, was certain it meant centralization of the IT function. Her counterparts, business unit CIOs, were equally certain it meant that Mary's corporate IT organization would answer to them. Meanwhile, Eric, the CFO, understood it to mean chargebacks.

What's the real meaning of the term, and what should leaders be doing about it?

The Real Meaning of the Term

The concept of a shared-services organization is, at the highest level, an alternative to decentralization. Instead of each business unit owning its own little group, they all buy some (or all) of these internal products and services from a central group.

Let's take a look at the benefits, and then what it takes to make it work.

The Benefits of Shared Services

By sharing a centralized internal service provider, business units gain many advantages.

The biggest advantage is cost. Centralization offers economies of scale.

When it comes to staff, imagine three business units, each of which needs a certain specialty for roughly two-thirds time. Instead of each of the three hiring their own person, they can share just two people.

Economies of scale in both staff and infrastructure also occur through better balancing workloads. One business unit's peak load may occur at a time when other business units are slow. Thus, total demand is less than the sum of each's peak.

Centralization also consolidates buying power. Some vendor licenses can be shared at a lower unit cost. Almost always, a bigger organization can drive a better deal.

Money is also saved when redundancies are eliminated. A shared-services organization can eliminate parallel training, product R&D, policy formulation, and support functions. It can even reuse work products (like IT software code), offering what appear to be customized solutions built on common components.

Beyond just cost savings, centralization can improve the quality of service. A larger organization can support a broader, more diverse product line. It can support its products better globally, 24 by 7. And it can afford higher caliber management.

Perhaps most importantly, a consolidated organization can support a higher degree of staff specialization. Greater specialization leads to performance improvements as widespread as greater speed, lower cost, higher quality, and more innovation.

A subtle but fascinating effect of shared services is the possibilities it offers for corporatewide business synergies. As business units find themselves using shared infrastructure and interoperable systems, they may collaborate more (and better) across boundaries. The implications for corporate strategy are as profound as the reasons why these business units are under the same corporate umbrella in the first place.

Implementing Shared Services

The bottom line is, a shared-services organization should be able to offer better internal products and services at a lower cost than business units can afford to make for themselves.

In theory it can; but unfortunately, in practice it doesn't always do so.

Some corporate groups see their role as controlling business units, for example, limiting business units' spending on a function or forcing one-size-fits-all solutions on them inappropriately. These corporate functions may be shared, but they're a far cry from being service oriented.

As a result, business units rightfully prefer their own internal service groups, even if their costs rise. At least they get the job done.

Of course, if corporate staff then demand a monopoly -- that is, force business units to buy from them "for the good of the company" -- resentment builds and the pressures for decentralization increase.

Amidst this tension, some corporate departments claim the territory of "common solutions" -- eg, in IT, the backbone network, mainframe computer center, and corporatewide applications -- and leave the rest to business units. This narrow vision certainly will not achieve the promise of shared services.

To succeed at shared services, the corporate internal service provider has to earn the position of "vendor of choice" through performance. It must view itself as a business within a business that exists to serve customers throughout the firm; and it must win market share by delivering great value with a high degree of customer focus.

Consider the four things that shared-services organizations must do well to become a vendor of choice.

Customer Focus

First and foremost, a shared-services organization must be very customer focused.

It must never judge or control its customers, or say "we know what's best for you." If there's a need for auditing business units' decisions, let the Corporate Audit group do it. A shared-services organization cannot judge and control its customers in any way, and then expect to be considered their partner and vendor of choice.

Beyond that, there is a specific set of behaviors that constitutes customer focus. Beyond just a customer-focus training, this involves a cultural change process that is comprehensive and lasting.

The good news is that the behavioral principles of customer focus are well defined, and changing culture really isn't all that tough or time consuming. Building a customer-focused culture is one good place to begin the path toward shared services.

Control What You Eat

Another common reason for decentralization is to allow business units to control their priorities. Business units resent having to beg, politic, wait in line, or justify their requests in order to buy the internal products and services they know they need.

Fortunately, you don't need to own your own grocery store to control what you eat. A shared-services organization gives business units absolute control over what they buy from it.

If it charges back for its products and services, then it's obvious that business units can control how much they spend and what they buy. But caution, I mean real fee-for-service: you buy, you pay; you don't buy, you don't pay.

Chargebacks are quite different from allocations, which distribute costs among business units after the fact based on a formula that's roughly based on utilization. Allocations do not give business units control of a checkbook, and in fact serve no economic purpose other than cost accounting. Oh, they do one more thing: They get business units upset about "taxation without representation" and put the shared-services organization on the defensive about its costs.

One bit of good news: You do not need to implement chargebacks to give business units control over what they buy. Recent research into the application of market economics within organizations shows shared-services organizations how to give business units control over what they buy without decentralizing staff and without chargebacks.

In essence, a market effect can be created when a shared-services organization considers its budget a "pre-paid account" -- a checkbook which belongs to its clients. The shared-services organization offers a catalog of products and services, priced at full cost (including a fair share of indirect costs to avoid all allocations).

Clients then decide what products and services they'll buy with their finite spending power, and they're invoiced for what they get.

Implementing a market-based internal economy -- more than just chargebacks, indeed with or without chargebacks -- is an essential element of the shared-services concept.

Customer Intimacy

Another reason for decentralization, and resistance to the idea of shared services, is the integration of support services (like IT) with the business. IT must fully understand and align itself with business unit strategies.

Of course, a shared-services organization risks living high up in the corporate cloud and not appreciating the unique strategic needs of business units.

The antidote is an effective Account Management function, staff within the shared-services organization dedicated to each business unit. Account Managers are responsible for a healthy relationship between business units and shared-services staff, and for aligning the shared-services organization with the strategic needs of the business units.

This is, essentially, a sales function. It's not project management, and it's not a part-time job for senior leaders. Account Managers are trained in methods of strategic opportunity finding, needs assessment, benefits measurement, consortium facilitation, contract brokerage, etc. And they maintain a presence in the business unit, attending key meetings, accessable to business-unit leaders, and attuned to its strategies and politics.

An effective Account Management function dedicated to business units allows the rest of a shared-services organization to be structured around product/technology and service-delivery lines of business, resulting in economies and synergies.

Value

Of course, a shared-services organization has to deliver a better deal than business units can provide for themselves. Otherwise, it doesn't deserve clients' business.

The value proposition is primarily driven by its organizational structure. A high-performance organization structures itself around lines of business (such as a branch of engineering, or a specific service) -- not traditional roles, responsibilities, processes, or vendor products. It adopts an organization chart of well-focused entrepreneurships, with the ability to combine diverse specialists onto cross-boundary teams as needed.

When staff focus on a single specialty, they get good at what they do. They keep up with the pace of technological change, improve their methods and tools, accumulate experience in their profession, develop templates and reusable objects, and ultimately deliver higher quality at a lower cost.

There's one other prerequisite to value: An organization must continually invest in itself to remain competitive. It must reserve some of its time for professional development and product R&D. It must acquire new methods, tools, and infrastructure. And it must continually improve its organizational processes.

Their are two sources of funding for these internal investments. One, its pricing must incorporate the appropriate level of indirect costs of unbillable time and ongoing improvements. Two, the corporation must provide a source of "venture funding" for capital investments and large, one-time improvement programs.

Investments in sustainability are a result of a well-designed internal economy, specifically the budgeting and rate-setting processes.

The Bottom Line

Shared services is not a matter of mandating that business units buy from a corporate department, nor is it simply spreading the costs of corporate support group.

Implementing shared services is matter of building a corporate internal service provider that's everyone's vendor of choice. This involves getting right the organization's culture, structure, work flows, and its internal economy.

A high-performance shared-services organization will attract market share over time. Business units will learn that they get a better deal without any loss of autonomy when they buy rather than make internal products and services.

It's not a simple undertaking. But the benefits of shared services are far reaching. It's the right thing to do.

How NDMA can help

Leadership briefings

Decentralization Versus Shared Services:
why the tug-of-war, and how to have your cake and eat it too

The Business-Within-a-Business Paradigm:
new modes of governance in empowered, entrepreneurial organizations

RoadMap® Transformational Leadership Workshop:
how to systematically design organizations to maximize human performance

Change Your Culture Now!

Rainbow Analysis Workshop
examine your existing/proposed organization chart in terms of lines of business under each manager, spot the problems, and identify opportunities for improvement

Speeches, workshops and seminars on financial and resource-governance processes

Assessment and action plan

Consolidation of Shared Services Strategy Workshop:
two-day workshop to clearly define who does what and how corporate policies will be set

Business Relationship Managers Strategy Workshop:
two-day workshop to clearly define the role of an internal sales/marketing function, and its specific products and services

Publications

Decentralization: fantasies, failings, and fundamentals.

An Introduction to the Business-Within-a-Business Paradigm.

Internal Market Economics: practical resource-governance processes based on principles we all believe in.

RoadMap: how to understand, diagnose, and fix your organization (second edition).

Fast Track to Changing Corporate Culture.

NEW BOOK:  Principle-based Organizational Structure: a handbook to help you engineer entrepreneurial thinking and teamwork into organizations of any size.

Case Study: Transformational Organizational Structure
how restructuring IT led to breakthrough performance and value
at North Georgia College & State University

Case Study: Sonoco Products Company
Building a High-performance IS Team

Case Study: Restructuring a Large IT Organization
theory, model, process, and initial results
by Mark Luker and Tad Pinkerton, University of Wisconsin Madison

Contact us for a free one-hour telephone consultation on your unique challenges.


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