“Shared service centers” constitute a business model that centralizes a suite of generic business and administrative functions under one business unit. Such centers differ from centralized management of a traditional business enterprise.
The Shared-Services Center as a Business Model
Traditional Administrative Services
In a traditional business enterprise, generic functions such as human resources administration, accounting, finance, legal and information technology are segregated into separate administrative departments. Such departments are usually under the command of the Chief Financial Officer, since they represent expenses to be managed.
Managed Shared Services
In the shared services model, such generic functions are aggregated and placed under the command of a business executive whose mission is to manage such functions for maximum benefit and minimum cost. This leaves the CFO free to focus on strategic issues such as critical elements in the corporate balance sheet, mergers and acquisitions, analysis of emerging threats and opportunities and other major corporate financial requirements.
The shared services organization (“SSO”) may be structured as a separate legal entity. As a “captive,” the separate legal entity could, in turn be a subsidiary of the operating parent or of a holding company parent. Or it could be a branch or department with separate accounting but no separate legal entity. Selection of the legal structure, along with the transition from a vertical organization to an SSO, will require careful analysis. Management should consider questions of legal ownership of intellectual property rights, human resources, taxation, guarantees, capitalization and other corporate and business factors.
How the Shared-Services Model Drives Business Process Management
Accounting Practices that Affect Effective Management of Covered Services
In the traditional business enterprise, internal costs of administrative functions may be hidden by adoption of a budget that identifies costs by department. As a result, support functions such as information technology, marketing accounting and HR administration are seen as a burden to the entire enterprise. This accounting system masks the true costs of the lines of business (by product line, by territory, by management group). As a result, efficient users of administrative services receive no reward for their efficiency, and spendthrift users of administrative services suffer no penalty to their bottom line. The corporate reward system thus rewards inefficiency and penalizes efficiency.
Activity-based costing, an accounting method for identifying all costs allocable to a business activity and its supporting activities, has been an accounting practice for decades. During World War II, governments set up cost-accounting control boards to manage the demand for goods and services by regulating prices on a fully distributed cost basis, when there was no straight procurement allocation for military matériel. Today, cost accounting represents the first step in the assessment of business process efficiency.
Internal Provider, Internal Pricing
Shared service centers offer internal service providers at internally determined prices. For chargeback of costs of administrative functions, the enterprise needs to decide whether to impose on business units that consume the internal services a pricing structure based on cost of delivery or one based on market prices. By definition, non-market prices are subject to distortion and result in distortion of resource allocation.
Service Level Agreements
Shared service centers can operate in many ways similar to an external service provider. They can negotiate service level agreements (“SLA’s”) to assure internal users of the quality of service. However, as with any system of rewards and penalties, internal service-center SLA’s need to be appropriately tailored to business needs, economic conditions and the corporate mission.
Business Planning and Account Management
Like outsourcing, shared service operations require suitable business planning and account management to identify and deliver services in accordance with emerging business needs of the internal user. Disputes may arise concerning SLA compliance, reasonableness of change orders and pricing, among other matters. Account management for shared services therefore finds inspiration in outsourcing business models.
The Shared-Service Model as a Solution to the Sourcing Dilemma
As a solution to the sourcing dilemma, the shared-services model offers considerable value.
Benefits to the Business Unit
By discarding the notion that business priorities are aligned through departmental accountabilities, shared service operations help the business unit manager more effectively manage the business unit. The shared services approach eliminates such traditional organizational alignment by giving the business unit manager the opportunity to make value decisions relating to the use of administrative and support functions. The providers of shared services are, in turn, driven to meet market-level quality using market-driven pricing and market-type incentives and penalties. The performance of the shared services center can be tracked, benchmarked against market providers (including outsourcing services providers) and managed for competitive effectiveness.
Interplay of Shared Services and External Services
In a modern global enterprise, business process management depends upon an effective interplay between internal and external resources. Market forces, which play so large a role in the phases of research, development, marketing, manufacturing and distribution, have a similar impact upon business process management of the back office and the middle office. As a result, shared services organizations (“SSO’s”) can serve as the procurement department to selectively obtain resources from internal and external providers and help integrate the two sources.
Organization and Implementation
Adoption of the shared services model is no panacea. Procter & Gamble had an efficient shared services organization before outsourcing finance and accounting, information technology and real estate management services in 2003. Instead, the shared services model opens the enterprise to transparency in accounting, which in turn opens new accountabilities and opportunities in the enterprise. If well managed, the shared services center can add value internally without some of the potential disadvantages of outsourcing. If poorly managed, the shared services center might highlight a need to outsource. Ideally, the shared services center can effectively manage both internal and external resources for overall process efficiency across the entire enterprise.