Leadership Foundation

The Shared Services Model

Shared Services Transformation: Conceptualization and valuation from the perspective of real options
Ning Su, Rama Akkiraju, Nitin Nayak, and Richard Goodwin, Decision Sciences Volume 40 Number 3 August 2009

Shared services have the potential to bring significant value to the firm. The model:

• Can lower firms’ operating costs by reducing the number of service employees and gaining efficiency.
• Can enhance firms’ architectural agility by facilitating their transformation toward new organisational forms such as “shared service organisation” and “service-oriented enterprise”.
• May improve organisational learning and innovation by concentrating technical and managerial expertise and facilitating knowledge sharing.
• May increase service quality by forming a customer-oriented mindset within the service organisation and professionalising service delivery.
• May also bring political advantages such as enhancing credibility and solving internal conflicts.
• In a global economic downturn like today’s, the need to leverage the benefits of shared services becomes increasingly urgent.

Meanwhile, implementing shared services incurs a number of risks

• Over-standardisation of systems and processes.
• Lack of operational flexibility.
• Unbalanced power concentration.
• Increased system complexity.
• Unclear service accountability.
• Dampened employee morale.
• Ineffective communication.
• Unexpected implementation cost escalation.
• Long project timelines.

These risks are exacerbated by today’s volatile economic environment and occurrence of unpredicted events. These risks may significantly affect the perceived and realised value of shared services, which eventually lead to limited user satisfaction.

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Modelling an HR Shared Services Center: experience of an MNC in the United Kingdom
Fang Lee Cooke, 2006

An increasing number of large and multinational organisations are moving to shared services models in delivering the human resource function. It is commonly believed that the adoption of an HR shared services model can transform the role of HR by enabling the HR function to be more strategic at the corporate level and more cost-effective at the operational level.

Reilly (2000) observes four strategic reasons for setting up HR shared services:

• To be part of a wider business change introducing the concept of “professional” or functional services;
• To achieve a greater degree of structural flexibility to respond to business change;
• To improve organisational learning across organisational boundaries; and
• To allow HR to reposition itself as more strategic; to reduce involvement in administrative trivia.

Organisations that opt for shared services often keep a small HR team at the corporate level to focus on high-level strategy, governance, and policy (Reilly, 2000). It is believed that by so doing, companies will be able to maintain best practices, monitor delivery, be more sensitive to customer needs, and generally reposition HR as more strategic and less encumbered by administrative tasks. Therefore, HR shared services focus on administrative tasks, such as relocation services, recruitment administration, training support, and maintenance of personnel data.

The findings of the study suggest that the implementation of the new shared services initiative exhibited a number of operational problems that are typical in change management. They conclude that the financial and emotional cost of moving to a shared services model can outweigh the tangible cost savings predicted by firms. The idea of separating the HR function into strategic, operational, and administrative components may prove to be too simplistic, although it underpins the initiative of HR shared services.

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Shared Services in Finance and Accounting
Tom Olavi Bangemann, Gower Publishing, Ltd., 2005

Shared services are described as:

Shared - to be used by several recipients (internal customers, partners, businesses) and Services – focusing on services (internal and administrative, not operational outputs).

Most large companies worldwide today have some kind of shared services concept in place. Over half of medium and large companies are currently engaged in some kind of shared service project activity. Within these large companies the investment in shared services is always calculated in millions. In other words, the costs of getting it right (or getting it wrong) can be huge.

There are a wide range of reasons for introducing such a model - while cost reduction is a major one, there are usually a number of reasons involved and benefits expected. The top 6 reasons companies introduced a (financial) shared services model (from 2003) are to:

1. Reduce administration costs (79%)
2. Improve services and quality, accuracy and timeliness (69%)
3. Reduce headcount and salary/wages (64%)
4. Group similar tasks and expertise for a critical mass (61%)
5. Standardise services (44%)
6. Simplify roll-out and IT systems support (38%)

Competition is key, “The key to shared services is treating what was once a corporate service like a whole new business. This is achieved by duplicating the environment of an independent service business, including customers, counting costs, and letting in the competition. Just as market competition improves a firm, so it will improve your in-house business”(Quote from JBS).

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Essentials of Shared Services
Brian Bergerson, 2003, ISBN: 978-0-471-25079-1

Bergerson’s definition of shared services is “a collaborative strategy in which a subset of existing business functions are concentrated into a new, semi-autonomous business unit that has a management structure designed to promote efficiency, value generation, cost savings and improved service for the external customers of the parent corporation, like a business competing in the open market.”

Shared services is one of a number of options for dealing with the duplication of activities across an organisation - other, more traditional, approaches include centralising all similar activity within the organisation, or outsourcing all such activity to an external company.

“The shared services model is fundamentally about optimizing people, capital, time and other corporate resources”. The main reasons for adopting a shared services model are:

• To increase efficiency.
• Make cost and time savings.
• To improve service.

Common disincentives for moving towards shared services are:

• That this new model requires a significant culture change among employees (ie moving into a new business unit aiming to compete for the business of the parent company).
• The new business unit is also likely to require less employees to function effectively - what happens to those workers no longer required in the same capacity?
• The new unit will have high start-up costs - sometimes akin to starting a new company.
• There will also be a loss of control for the ‘parent’ company as the new unit will be led and managed on a semi-autonomous basis.

In addition, the shared services model has been found to require a certain size of parent company and overall revenue stream involved, to work. For example, “the shared services model is a viable option where the savings from reduction in staffing are greater than the added overhead of creating a management structure to run the shared business unit”.

Key to the shared services model is ‘competition’ – the new business unit must offer the best option for the parent company in terms of pricing and services (as opposed to centralising or outsourcing) – otherwise the parent company should be free not to use it and it will fail.

The shared services model did not originally involve different organisations setting up a new ‘semi-autonomous unit’ between them to take over some of their processes. It tended to be departments within a large corporation, or businesses with the same parent ‘owner’ who set up this new unit to take on all relevant services. 

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For more information about the Knowledge Resouces contact:

Eleni Stamou, Research Manager