Outsourced Support for Shared Service Centers and Captives

In the paradigm of a shared service center or captive service provider, the service center or captive might perform all services internally. Such internalization might reflect a management's favored policy of insourcing. Or it might merely be a manifestation of an early phase in the maturity of the shared services model or captive model in that enterprise.

As shared service centers and captives evolve, they begin to act like a sophisticated purchasing or procurement department. They start hiring outsourcers to fit different needs.

"Staff Augmentation" Outsourcing

On a "staff augmentation" model, a shared services center might hired external services providers on an "as needed" basis to supplement internal resources.

Staff augmentation might result in a relatively high turnover in the personnel providing the contracted services. Staff augmentation on a large scale cannot be done effectively for long periods unless a staff augmentation company serves as provider of the labor.

Staff augmentation companies exist to manage the turnover rates, vet each individual for skills and background checks, and serve as an intermediary for managing the financial relationships with the individual personnel and the enterprise customer's shared services center.

Staff augmentation companies, unless traditional "process augmentation providers," do not guarantee the work results, do not generally assure any service level agreements and do not agree to engage in specific training or process development or quality improvement. The shared services center must identify and manage such issues, to the extent they might arise in a longer project.

"Process Augmentation" Outsourcing

On a "process augmentation" model, the shared services center that identifies a new process to be delivered to its internal (enterprise) users could hire an external service provider to do so. The decision to outsource or insource might depend on the usual factors, but in this case a critical factor is whether the enterprise has a commitment to develop and maintain expertise and technology necessary to support the particular process, as well as whether this can be done in a cost-effective manner. In short, process augmentation outsourcing enables a shared services center to avoid making a capital investment.

Following the classic outsourcing paradigms, process augmentation providers deliver the same commitments to shared services centers that they deliver to centralized enterprise departments.

Recommended/Endorsed Provider

Shared services centers and procurement departments might identify "approved" vendors and endorse their use by the employees or customers of the enterprise.

"Selected" Provider

Shared services organizations and captives can be created from many different starting points. Normally normally involve the consolidation and assemblage of existing internal back office staff under one central organization.

Where there is no existing internal back office staff but the enterprise wishes to provide, or make available, specialized services in support of its customers, the enterprise might select a third party to host a service. This "selected" or "ghosted" service might be useful to the enterprise's customer and might enable cost savings where the enterprise can aggregate demand and pricing among many small customers. This occurs in services such as insurance brokerage, claims support, research, website hosting and back office operations of the customer.

Designation of a "selected" provider can have significant risk for the enterprise. By endorsing a third-party's service, it might be incurring reputational risk or even possible contractual liability or tort liability. Unless the enterprise controls the quality of such services, any selection could result in lost reputation.

Affinity Groups

Experience suggests that, rather than aggregate demand for customers by hiring and controlling a third party, the enterprise can simply offer its employees and customers to the third-party service provider on an "affinity group" basis. This will permit negotiation of group-based volume purchase discounts and reducing the enterprise's liability for a breach or failure by the third party. In this scenario, appropriate liability disclaimers should be addressed to the intended beneficiaries.