Shared services promises many benefits, including cost savings, improved safety and quality, and synergies.

Nonetheless, many business-unit executives advocate decentralization -- for good reasons.

This executive summary provides a overview of why people like decentralization (the benefits), the (not-insignificant) costs, and what a shared-services organization must do to consolidate its function.

Definitions: What Does "Shared Services" Mean?

While working with the IT leadership of a large company, I found everyone enthusiastic about the concept of shared services. Mary, the corporate CIO, was certain it meant complete 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.

Actually, it's none of the above.

"Shared services" describes an organization that provides services to multiple groups of internal customers.

Technically, every internal service group is a "shared service" to its customers. But decentralized functions serve only customers within their immediate business units.

When people speak of shared services, they typically mean enterprise-level organizations. Instead of each business unit owning its own little group, they buy some (or all) of the support services they need from this central group.

Any function (except product management itself) is amenable to shared services.

Typically, people think of business support functions such as IT, HR, Finance, Supplier Management (procurement), Facilities, Administration, Public Relations, etc.

In more advanced cases, the concept also applies to product-related services such as Engineering, Manufacturing, Logistics, Supply Chain, Marketing, and even Sales.

Case study of an entire company based on the concept of enterprisewide shared services....

"Decentralization" is the opposite of shared services. It means breaking up a function into small groups, each serving a subset of the enterprise (such as a single business unit).

Benefits of Decentralization: What Internal Customers Want

Decentralization happens for a reason. Business-unit executives choose not to do business with enterprise shared-services organizations, and instead insist on owning their own support functions.

They have legitimate reasons, including the following:

• Control: Business-unit executives are accountable for their bottom lines. So, naturally they demand authority over all their factors of production, including support functions.

  You wouldn't go to a shared-services grocery store unless you can control what you eat. That includes control of what you get, and how much you spend.

  Business leaders are no different. They know they can control the priorities of groups that report to them. But they may feel they have to beg, play politics, wait in line, or justify their requests to get what they want from the enterprise shared-services organization.

• Strategy: Business units are unique in their missions and strategies, and hence in their requirements for services.

  They may be open to shared services for what they have in common -- routine administrative processes. But if a shared-services organization prefers to work on enterprisewide needs, business units that depend on it may lose many strategic opportunities.

  Business leaders believe that a group reporting to them will be "closer to the business" and better understand their local strategies, and will be more willing to address their unique strategy-driven needs.

• Customer focus: When a decentralized function reports to you, they respect you.

  But business-unit leaders may feel that corporate staff treat them as a nuisance rather than a customer, or worse, as unruly children to be controlled.

  Business-unit executives will not do business with a shared-services organization that treats them as supplicants, nuisances, or victims. They know they deserve to be treated as respected customers.

No matter how great the benefits of consolidation may be, business-unit executives are not going to willingly buy into shared services until these reasons for decentralization are addressed.

What these business leaders may not know is that decentralization is costing them money, reducing safety and quality, and undermining corporate synergies that may be strategic.

Furthermore, the benefits they're getting from decentralization can all be delivered by a healthy centralized (shared-services) organization.

Having recognized the benefits of decentralization, let's examine the costs. Then, we'll look at how a shared-services organization can deliver what business-unit leaders rightfully want, and how they can "have their cake and eat it too."

Costs of Decentralization

Decentralization increases costs and reduces quality for two reasons: reduced specialization, and fragmentation.

Reduced specialization: When staff are scattered among the business units, they cannot specialize as much as they could within a larger consolidated function.

Consider this IT example: Each business unit might have a small team of applications engineers to support their entire suite of systems. If those same staff were consolidated, they could specialize in the various types of applications, such as finance, customer, order-to-ship, human resources, etc.

A larger shared-services organization permits a greater degree of specialization. When staff focus on a single specialty, they accumulate more experience in their field of study and get good at what they do. They keep up with the pace of technological change, enabling a faster pace of innovation. They improve their methods and tools, develop templates and reusable objects, and ultimately deliver higher quality at a lower cost.

Specialists perform better than generalists. It's that simple.

Also note that a greater degree of specialization provides more interesting career paths for technical professionals. It attracts top talent, and motivates people to succeed.

Fragmentation: Fragmenting staff inevitably fragments their services. For example, where IT is decentralized, it's not uncommon to find different financial, customer, and procurement applications in each business unit.

When solutions are fragmented, costs rise for many reasons....

There's duplication of efforts. It requires parallel training, product R&D, policy formulation, and support functions.

Fragmentation can also impede the reuse work products, e.g., where customized solutions are built on common components.

Fragmentation generally leads to many versions of essentially the same internal products and services. This drives up manufacturing and support costs.

Fragmentation also can forego savings through sharing licenses and assets.

Economies of scale are lost. This certainly applies to assets (infrastructure). But it affects staff too. Imagine three business units, each of which needs a certain specialty for roughly two-thirds time. Instead of each hiring their own person, the three can share just two people.

"Safety stocks" (in inventories) must be larger; consolidation can reduce inventory carrying costs. This affects staffing, too. 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.

And bargaining power with vendors is diminished. Almost always, a bigger organization has more buying power, and can drive a better deal.

Beyond just costs, decentralization typically impairs the quality of service. Small groups cannot adequately support a broad, diverse product line. They find it difficult to provide support globally, 24 by 7. And small groups can't afford high-caliber management.

More insidious, synergies across business units are lost. Corporate synergies can be found in every external interface: customers, vendors, investors, regulators, media, and the community. More subtle but still powerful, synergies can be attained through collaboration across business units in every functional area.

Fragmenting support staff undermines these enterprise synergies. As business units find themselves using disparate solutions and services, they find it harder to collaborate across boundaries. The implications for enterprise strategy are as profound as the reasons why these business units are under the same corporate umbrella in the first place.

Benefits of Shared Services

The costs of decentralization are the mirror image of the benefits of shared services, including:

• Productivity
  
• Quality
  
• Speed
  
• Innovation
  
• Career paths that attract talent
  
• Savings by elimination of redundant efforts
  
• Economies of scale
  
• Reduced safety stocks
  
• Bargaining power
  
• Quality of service
  
• Enterprise synergies

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 do for themselves.

The Impediments, and the Need for Transformation

In theory, shared-services should always outperform decentralization. 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 it costs more. 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 corporations go to great lengths to remain decentralized and "patch" the problems it creates. They talk of "federated" functions; they impose "governance" in the form of committees and working groups; and they try to hold the enterprise shared-services executive accountable for things he/she cannot control.

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

Ultimately, these patches are ineffective. The right answer is consolidation.

How to Go About a Shared-services Consolidation: The Tortoise Versus the Hare

One way to establish shared services is through edict. A corporate mandate may force consolidation over the objections of business-unit executives.

This may appear to be the quickest approach (the hare in the proverb), but in the long run, it rarely works. It sets up an antagonistic relationship between the shared-services organization and the internal customers it's supposed to serve. That, alone, undermines its effectiveness.

Meanwhile, it drives decentralized work underground, for example, engineers doing IT work, and administrative staff doing HR work. Eventually, the pendulum swings back to decentralization.

Perhaps worst, shifting work to an organization that's not ready to deliver great service forces business units to do without services they need. This can undermine the performance of the entire enterprise.

The best strategy is not to consolidate shared services (hoping to save money), and then find that the quality of service to business units has suffered.

A safer and more effective approach is to transform an existing shared-services function into the "supplier of choice" to the business units.

"If you build it, he will come."

Field of Dreams (1989)

Once the reasons for not wanting to do business with the shared-services organization have been taken away, business leaders will learn that they get a better deal without any loss of autonomy when they buy, rather than make, internal products and services.

Services will be consolidated when it makes sense to do so -- that is, when the shared-services organization can deliver the benefits, and when business-unit executives are comfortable letting go of their decentralized functions and buying from the shared-services organization.

Thus, a healthy shared-services organization earns "market share" over time through relationships, performance, and value (the tortoise).

Furthermore, consolidation occurs with minimal political costs.

To do this, a shared-services organization must address the reasons business-unit executives prefer decentralization, despite its costs and weaknesses.

What Shared-services Organizations Must Do to Earn the Business

If you consider the reasons people advocate decentralization, all can be addressed by a high-performing, customer-focused shared-services function.

Here's what shared-services organizations have to do to overcome the forces that cause decentralization:

• Control: You don't need to own your own grocery store to control what you eat because you control your checkbook.

  The same is true of enterprise shared-services functions. Business-unit executives must be able to control what they "buy" from internal service providers.

  This does not require committees and bureaucracy; and it does not require chargebacks. What it does require is resource-governance processes based on market economics.

  Internal market economics is based on:

  • A comprehensive service catalog that defines what customers get (not what the organization does).

  • Accurate cost-based rates for services in the catalog.

  • An investment-based budget that negotiates funding based on what a shared-services organization will deliver (not just what it proposes to spend).

  • If the shared-services organization is given direct budget or allocations (as distinct from fee-for-service chargebacks), a demand-management (priority setting) process that gives customers control over the shared-services organization's priorities.

  • Great value, through cost control and by applying any and all specialists (as needed) to every project or service. (It does no good to consolidate staff and then leave them substructured by business unit.)

  • An entrepreneurial culture in which staff think creatively about new ways to add value, and willingly expand supply to meet funded demands.

  • Project-management and service-delivery processes that impeccably deliver every commitment.

• Strategy: A shared-services department can be just as "close to the business" as any decentralized function.

  This requires:

  • An organizational structure that includes "relationship managers" dedicated to business units who specialize in knowing customers -- their people and their strategies -- and the linkage between that business and the organization's services.

    This is, essentially, a sales function. Relationship 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.

    Relationship management is not a part-time job for senior leaders. It's a distinct profession, and a full-time endeavor. Relationship managers maintain a presence in the business units; they attend key meetings, are accessable to business-unit leaders, and study clients' strategies and politics.

    An effective relationship 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.

    More on the relationship management function....

  • Methods by which those relationship managers can proactively facilitate the discovery of strategic opportunities -- products and services which contribute to (or even enable) business-unit strategies. (In IT, these are captured in the phrase, "digital enterprise.")
    More on opportunity discovery methods....

    There are numerous other services of the relationship management function, all of which add value in ways that technical professionals cannot.

  • An organization that willingly delivers unique products and services that directly address the unique needs of business-unit strategies (not "one size fits all"), while maximizing synergies through shared components, data, and talent.

  • Processes by which business units can collaborate as consortia to buy shared processes and solutions (e.g., in IT, a shared ERP application).

  • Innovation in its service offerings to create future strategic opportunities.

• Customer focus: A shared-services department can be just as customer focused as any decentralized group.

  Highly effective relationships between business units and everyone in the shared-services organization is the result of:

  • A customer-focused culture. This must go beyond just staff's style of interaction with clients. Shared-services staff must serve clients needs, without an agenda of their own. They must never say, "We know what's best for you."

  • Account representatives that facilitate relationships and resolve disputes.

  • Also, a shared-services organization must never be chartered to judge or control its clients. You just can't say, "I'm from the IRS and I'm here to help!"

    Controls over business units must be applied through the legitimate lines of reporting (bosses) and through an arms-length audit function, but never through a shared-services organization. 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.

  • 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 defines jobs as lines of business (such as a branch of engineering, or a specific set of services) -- not traditional roles, responsibilities, processes, or vendor products. And it's good at fluidly combining diverse specialists into cross-boundary teams as needed.

    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 processes.

    Investments in sustainability like these require a well-designed internal economy, specifically the budgeting and rate-setting processes.

Get to Root Causes

Wait! Don't start work on the above list of requirements!

Don't fix symptoms (or you'll find yourself fixing them again and again). Get to the root causes, the organizational systems that drive staff's behaviors:

• Structure: both the organization chart and workflows. This provides:
  • Definitions of the lines of business of each group, which is the basis for service catalogs, investment-based budgeting, priority setting and accountability for results.

  • Cross-boundary workflows that bring together any needed specialists to every project or service.

  • Relationship managers of the appropriate stature, dedicated to business units.

• Internal economy: resource-governance processes including budgeting, demand management, and reporting. This provides:

  "I manage unit costs. You manage volume."

  Preston Simons

  • Cost control at the unit-cost level (not control of total spending which is driven by customer purchase decisions).

  • A business and budget planning process that forecasts the costs of what you plan to "sell," not just what you plan to spend.   [MORE....]

  • Accurate rates for services in the catalog, at full cost (with fair share of indirect costs) but without burdens for any enterprise costs that external vendors wouldn't include in their prices. (This isn't difficult if you implement investment-based budgeting.)

  • Business-driven demand management (priority setting) processes.

  • Explicit channels of funding for innovation.

• Culture: a clear definition of how we work. Beyond values, this includes pragmatic operating principles in themes such as:
  • Customer focus (pleasing customers)

  • Entrepreneurship (remaining competitive)

  • Integrity (the behaviors that inspire trust, including impeccable delivery of every commitment)

  • Interpersonal relations (working well with other people)

  • Teamwork (collaborating on projects and services)

  • Empowerment (authorities and accountabilities match)

  The good news is that best-practices behavioral principles in all these themes are well defined, and changing culture really isn't all that tough or time consuming.

• Methods: the skills, processes, and tools by which staff deliver work. Key examples relevant to shared services include:
  • Opportunity discovery, to help business units discover ways to leverage their strategies, or enable new strategies, using the products and services of the organization.

  • Benefits estimation, including strategic value, to assist in the demand-management process.

  • Consortium facilitation, to help multiple business units collaborate to share common solutions and information.

  • Project management to ensure reliable delivery of all projects.

  • Service management to ensure reliable, safe, efficient, and relevant services.

• Metrics and rewards: the dashboards and incentives that give people feedback and incentivize performance. This reinforces all the above influencers of behaviors.

A Shared-services Strategy

In establishing shared services, the key is to focus on root causes (not symptoms). Thus, an effective "shared services strategy" plans the right sequence of those critical organizational systems:

• Structure   [NDMA services....]

• Internal economy   [NDMA services....]

• Culture   [NDMA services....]

• Methods   [NDMA services....]

• Metrics and rewards

In short, an effective shared-services strategy is an organizational (transformation) strategy that develops a shared-services organization which earns market share as the supplier of choice to business units.

Once the approach of "earning market share" is established, business units shouldn't feel threatened about a corporate "take-over." As they build confidence in the shared-services organization, business units can collaborate with shared-services leaders to decide what specific services to "outsource" to them (i.e., to consolidate).

With this approach, as the shared-services organization becomes better and better at serving its internal customers, more and more functions are consolidated. The tortoise wins the race.

It's All About Leadership

"If a man can write a better book, preach a better sermon or make a better mouse trap than his neighbors, though he builds his house in the woods, the world will make a beaten path to his door."

Ralph Waldo Emerson (1882)

An enterprise can have all the benefits of decentralization without fragmenting its support functions. The key is a shared-services organization that earns clients' business thanks to its structure, internal economy, culture, methods, metrics, and of course talent.

It's a matter of leadership. Is the shared-services leader willing to invest in a high-performance business within a business, or just settle for the obvious shared services that have to exist at the enterprise level?

A shared-services leader with a vision of a high-performance business-within-a-business can deliver all the benefits of decentralization along with all the benefits of consolidation. It's the right thing to do.