Shared Services: A Catalyst for Transformation

We are seeing an increasing number of businesses seriously consider the idea of a shared services model for the provision of internal business services.  The implementation of a shared services centre (SSC) can hold understandable appeal, as international corporations respond to challenging markets by seeking to identify efficiencies and savings in their operations.

The initial driver for proceeding down this path (which invariably involves a restructuring exercise) is usually the cost savings on offer.  By pooling resources in a single SSC and harmonising practices across business divisions, a company can quickly realise tangible benefits such as employee-cost reduction and efficiency savings.  Large-scale procurement of supplies by a centralised function also permits economies of scale to be leveraged to good effect.

However, this is only part of the potential story.  Businesses that implement a shared services structure most successfully are those that allow the intra-group service provider to gain maturity and to fully deliver ‘value add’ benefits.  With the right investment and the required buy-in from management teams, SSCs can deliver continuous improvement programs and drive ‘transformational’ efforts across a business.

In this article, we will explore some of the key issues which should be considered when considering a SSC model – in order to both mitigate risk and maximise the chances of a successful implementation.  We also set out below a table summarising the headline points that we discuss. 

Set-up options and location

In legal terms, the structure of the SSC is simple.  Organisations will most likely identify one of the two following options:

·      a fully owned shared services subsidiary/subsidiaries sitting within the existing corporate group; or

·      joint venture with a service provider ‘partner’.

These structures can be contrasted with a more traditional group-wide outsourcing of similar services (as may have been considered in the past by many businesses which are now countenancing an SSC model).  Under that arrangement, a company may enter into a framework agreement with a single global provider (of a single set or multiple sets of services), under which it and its affiliates can call-off services as required from time to time.  Such an outsourcing inevitably involves a greater deferral to the external provider, whereas it is critical that an SSC retains suitable knowledge and experience in-house in order to operate successfully.

With regard to location of the SSC, it is important to distinguish between the establishment location for tax and legal purposes versus where to physically locate the SSC for operational purposes. These locations may not be the same. There will be various drivers behind the choice of these locations: (a) the existing structure of an organisation, whether that be delineated on a divisional or business unit basis or a geographical basis, will clearly be a key consideration; and (b) employment issues, tax and accounting treatment, funding models, and ease and cost of leasing real estate will also be important. 

Overheads and other costs

As mentioned above, the attractive cost savings on offer are likely to be a key driver behind any movement towards a SSC model, particularly in the early stages.  Not only can employee-cost reductions be easily visualised (generated through rolling-up various support teams across a business into a single SSC entity) but there is also great scope for processes and systems to be standardised and streamlined.  For example, an accounts payable function (often one of the first elements to be brought within a SSC’s remit) can readily benefit from the use of a single system deploying standardised, enterprise-wide invoicing processes. Moreover, standardisation invariably opens up the possibility of automating those processes. In the accounts payable context, this could mean users interacting with IT systems in a ‘self-serve’ way, which adds a further layer of cost saving and efficiency. 

Any SSC should also look to maximise the impact of the following two factors:

·      lower per unit procurement costs – the greater purchasing power of the SSC means that it should be able to secure improved commercial terms from its supplier base; and

·      no duplication of costs – procurement through the SSC should avoid business units or group companies sourcing the same technology or services in a duplicative manner.  

Migration issues

As with any business restructuring, significant planning will be required in order to migrate from the ‘old world’ to the ‘new world’.  By way of example, HR factors demand careful consideration (as large numbers of employees may need to transfer to another group entity), as will maintaining the continuity of technology and services.  It might be that transferring employees enjoy legacy arrangements which they will wish (and may be legally entitled) to safeguard.  Legacy IT systems will also need to be wound-down and data migrated to the consolidated, centralised system (assuming one is to be implemented by the SSC). 

In addition to consideration of the operational issues, in-depth legal analysis will be required to ensure relevant contracts are either terminated, novated or put in place to preserve relationships with key suppliers and underpin the provision of ongoing and future services. Ensuring a broad view is taken so that group companies can benefit from the services or supply will be important.   

Control of systems

The migration to the ‘new world’ (the use of one customer relationship management system across a business, for example) can realise a key benefit of an SSC, namely that systems can be administered from a central point, reducing the proliferation of individualised, duplicative, end-user systems within an organisation.  This means a ‘single version of the truth’ can be preserved and reduces (as far as is possible) wastage of time and resources.  However, the advantage of this new level of uniformity will be fully gained only if the SSC quickly achieves the same level of service provision as was experienced previously.  If not, individual users within an organisation will likely suffer a drop in productivity and/or not use the new system – this would be a worse position than before.

Continuous improvement and other cultural ‘buy-in’ requirements

Once the initial wins of cost reduction and efficiency-related savings have been achieved, there is a real risk that the trajectory of the SSC’s delivery of value can plateau. 

To avoid this, the organisation as a whole (and particularly key management stakeholders) needs to focus on the transformational possibilities that an SSC can bring to the table.  To take the accounts payable example further, by housing all payment functions centrally the accounts team can have unprecedented oversight of cash flows and of usage of suppliers.  This allows the production of insightful management information and the chance to gain greater value from a supply chain. 

The potential advantages are even greater if other business functions are combined in the same model.  By way of another example, an SSC housing the HR function can take a strategic approach to managing a  global workforce by co-ordinating recruitment, training programmes, policies and projects centrally which should mitigate risk (especially in remote locations) and reduce further cost over a longer term. 

It is critical that the SSC has the right profile internally in order for this second wave of benefits to be realised.  Further, they will not be achieved if there is too great an emphasis placed on cost savings alone.  As with any business department, an SSC requires an appropriate level of investment in order to both fulfil its initial (cost saving) remit and to grow into something of greater significance. 

Accountability and problems associated with overly-centralised functions

A key role of management will be to identify the key performance indicators against which the SSC will be assessed.  On the one hand, the use of a streamlined set of systems and processes by the new intra-group service provider will make this task a simpler one than might have been previously the case (when a more fragmented set of metrics would be needed to assess enterprise-wide performance).  However, the risk of the SSC enjoying an internal monopoly on service provision must be borne in mind.  As with any movement towards centralisation, it is critical that the SSC does not become an overly-bureaucratic impediment which is isolated from the workings of the rest of the business.

A related further challenge that any SSC will face is whether standardisation of services will still deliver the functionality, service or benefit to all parts of the organisation. The SSC should keep a very keen eye on this issue as, if parts of the organisation believe they are not being serviced or supported by the SSC, those parts of the organisation are likely to avoid using the SSC. This would undermine the future of the SSC as pan-organisational ‘buy-in’ is critical to its on-going success.

Talent pipeline

An SSC allows an organisation to keep and develop talent in-house, those with invaluable corporate knowledge and experience of internal service provision are retained (as opposed to the ‘brain drain’ sometimes associated with the engagement of outsourced providers).  However, the career ladder of talented individuals needs to be structured carefully so that they gain a broad experience of working across an organisation, as opposed to solely within a siloed service provider function.

M&A

By implementing standardised systems and processes across a corporate group, new business acquisitions by the group can be assimilated relatively easily into the structure.  Similarly, disposed entities can be hived off (whilst retaining the ability to provide services on a transitional basis following such disposal, if required).

Conclusion

Although the concept of a SSC is not new – organisations established offshore ‘captives’ years ago – the new wave of SSC seems to have taken on a different flavour. Unlike previous forms of SSC, SSCs are now not just about doing the same job in a lower cost jurisdiction, and thus making savings, but instead achieving savings through transforming processes, releasing efficiencies and being smarter about purchasing. This certainly represents an evolution in the way this form of internal service provision is talked about. 

Global and/or diverse organisations should seriously consider whether the establishment of an SSC could offer the step change they require to reduce their costs and realise efficiencies in a meaningful and sustainable way. 

Hinal Patel is a Partner in the Information, Communications & Technology Group at Simmons & Simmons.

Marcus Clayden is an Associate in the Information, Communications & Technology Group there.

 

Summary issues table

Issue	Advantage of shared services structure	Disadvantage of shared services structure
Location	Consider whether to have an on-shore or near-shore service centre (assessing HR, tax, real estate and other factors).	Need to justify the typically more expensive SSC location (when compared to a low cost, off-shore outsourced provider model).
Overheads and other costs	Initial cost savings can be readily realised. Use of shared services entity as a ‘gateway’ to external expertise allows this to be sourced in an efficient and targeted manner.	Long-term cost savings can be more difficult to achieve – the challenge of making the SSC both more efficient and more effective than the prior state.
Migration issues	Greater degree of continuity than if services migrated to an independent third party.	Needs to be carefully managed to ensure that service provision continues to be of the required standard and that the productivity of internal clients does not suffer.
Control of systems	A SSC allows systems to be administered from a central point.  A ‘single version of the truth’ can be preserved.	Migration from an individualised to a centralised model is beneficial only if the same level of service provision as was experienced previously is quickly achieved.
Continuous improvement	With the right culture, a SSC can create a focus on continuous improvement which harmonises processes and ensures best practices are applied. SSC performance can be monitored precisely and benchmarks can be readily constructed to assess results.	A continuous improvement culture needs to be carefully cultivated – and this requires significant buy-in from management.
Overly-centralised functions	Performance can be assessed easily.	A SSC structure poses the danger that a business will become bureaucratic and unconnected with the business.
Accountability	With strong internal governance, SSCs can be held to account against clear performance indicators.	Risk that service provision might suffer, especially if too much emphasis is placed on the cost-saving, as opposed to transformational, elements of the structure.
Talent pipeline	In comparison to the outsourced model, a SSC retains expertise, management experience and corporate knowledge in-house.	In a SSC model, there is a risk that individuals do not have broad experience of working across an organisation.
M&A	New acquisitions by the group can be easily assimilated into the structure. Disposed entities can be easily hived off (and services can be readily provided on a transitional basis following such disposal).	Incoming organisations will be forced to adopt new systems and processes which could slow down their productivity initially.