Moving Shared Services Up the Value Chain; Strategies Beyond BPO
Written by Mike Markos

Shared services, as a business tool, have created tremendous value in Finance, Human Resources, and other functional areas in companies around the world. As shared services have moved into states of maturity, companies have been looking to answer the question of “What’s next? How do we continue to add value?” Many have turned to business process outsourcing and have found significant benefits. However, this is not the only strategy to continuing to add more value. We have found that there are numerous opportunities for adding significant value, potentially well-beyond what has been achieve so far, by recognizing that there are different types of value that need to be managed differently. When these are recognized, new strategies can be put in place to continue to move up the value chain. And this approach works whether companies have gone down the BPO route or not.

Value in the Bank

Shared services has grown from an evolving concept fifteen years ago to a “household word” and common tool in major companies across the world. What has made it so successful is that shared services have created real and significant value for companies. Whether it was consolidating payroll and accounts payable or establishing common processes, policies, and systems, the payoff has been tangible. By far the greatest benefit of shared services in nearly all companies has been substantially increased productivity and much lower costs. This focus on shared services productivity improvement has continued in most companies. Consolidation and management focus, process reengineering and new and enhanced technology have led to incredible productivity gains. For example, accounts payable processing has increased from 5,000 to 6,000 invoices processed per accounts payable employee per year to 80,000 or more in the more progressive centers. Payroll costs have decreased from $400 to $500 to process the payroll per employee per year to less than $50. The value is real and it is measurable.

These well-managed administrative and expert centers have also edged into more administrative areas and have expanded their services from the traditional and common because of the competence they demonstrated. This scope expansion strategy has created even more cost reduction.

Determined to continue to mine cost reduction from the administrative processes, many companies have decided to outsource or offshore these processes. Outsourcing (BPO and ITO) has allowed companies to contractually extract future savings from these processes. It has also allowed companies to further remove concerns of managing these processes from the company and move them to outside experts where managing administrative processes is a core competency. Additionally, off-shoring, whether captive or not, has been a successful labor arbitrage play for many shared services organizations. Again the value has been cost reduction.

Three Types of Value

With these remarkable successes behind them, leading companies have recently been asking, “What’s next? How do we move further up the value chain?”

We undertook some research to learn what really is next, and we were surprised. We had expected that “what’s next” would be a compilation of additional services and processes companies are bringing into shared services to gain the same kinds of cost reduction achieved in other processes. And although there are important new expanded-scope processes being identified in companies regularly, we found that leading companies are thinking about value differently, that “moving up the value chain” is becoming more sophisticated, and more opportunities are being demonstrated.

We realized that cost reduction, or what we now call “economic benefit” is only the first type of value that shared services does or can provide. This economic benefit is a result of cost reduction within the shared service process or money recovered because the process is being managed better. And we learned that there are actually two additional types of value shared services can bring: Process Integrity Value, and Business Value. The chart below shows the value three types that have developed over time.

It became clear to us that even with all the Type 1 Value that shared services has and continues to provide, greater value producing opportunities are here or on the horizon.

Type 2 Value

Type 2 Value has emerged at least partially by accident, and the better shared services organizations are producing significant amounts of it. In the quest for greater productivity, the professionally managed shared services organizations sought “best practice” process improvements that also yielded better quality and an environment of heightened control. The improved processes were managed in a small number of locations and were therefore much easier to control. There was far less risk of business units taking approaches that were not consistent with company policies. The timing could not have been more perfect. Just when companies needed to comply with Sarbanes-Oxley requirements, many of their processes were managed under a single roof. This meant the processes could be monitored and audited easily, and policies could be enforced. Executives were pleased with their earlier “brilliance” in instituting shared services because of the control benefits that are currently obvious. Those companies that had not implemented shared services previously were feeling the pain of complying with Sarbanes-Oxley in highly distributed environments. It has been much more difficult for them to manage and unimaginably expensive to audit to provide necessary assurances for the sign off.

Additionally, it became clear that other areas of compliance from state and local tax policies, to escheatments, to employee leave policy could be far better managed and compliance far more assured in the shared environment. Shared services had become an asset for control, and it was a natural because so many organizations had built processes to best practices, and there were assurances that integrity lay within the process. The value of process integrity is clear. Although the Type 2 Value is somewhat less tangible than the Type 1 Value, business executives fully recognize the criticality of control and compliance and appreciate the peace of mind.

Type 3 Value

Type 3, Business Value, is emerging in leading shared services organizations. Business Value stems from the data and information repository shared services has because of the transactions it processes, its ability to mine and analyze the information, and its skills in managing and improving business processes. The results are potentially huge for Type 3 Value because it opens doors to business growth and cost reduction in the business processes beyond the administrative areas, as well as sourcing. Examples of this new and developing Type 3 Value are present in leading shared services organizations:

  • With access to customer and product pricing data, shared services people were able to show through analysis that products in short supply were being heavily discounted in certain branches. Raising these prices to market levels greatly increased product profitability.
  • Accounts payable analysis showed that customer rebates being paid by two suppliers were far less than what was agreed to. Suppliers were missing rebates for many orders. Millions of dollars of rebates were recovered.
  • Utilizing their proven process improvement skills, shared services people led improvement efforts for non-shared services business processes, resulting in major productivity gains.

However, there are often barriers to creating Type 3 Value. Shared services frequently does not have the credibility to be invited to participate in these areas. Additionally, shared services people sometimes have difficulty imagining themselves in the new roles. Nevertheless Business Value is there. Shared services and business leaders at leading companies believe it must be developed, just as Economic Value began to develop fifteen years ago.

Implications for BPO

The new way of looking at value points to many opportunities, including BPO. It also suggests caution in moving to BPO. There are examples of shared services organizations that have successfully outsourced, yet maintained an infrastructure to continue to pursue all three types of value. Yet many companies making the BPO decision have opted to take the short-term savings and focus only on the Economic Value of guaranteed cost reduction. Other companies have taken a broader perspective retaining resources to pursue all three types of value. Still others have chosen limited processes for outsourcing and off-shoring carefully so they can pursue all three types of value.

Strategic Options Moving up the Value Chain

With the knowledge that there are options on how to move up the value chain in shared services, companies need to carefully consider their shared services value strategy. Of course, the first consideration is the company’s business strategy and goals. The next consideration is capability and level of accomplishment of shared services.

With business goals and shared services capability and accomplishment in mind, setting the value strategy boils down to resource allocation. There are four basic strategic options to consider in moving up the value chain:

  1. Focus on Type 1 Value. This strategy is most appropriate when there remains unrealized significant opportunity for productivity improvement and cost reduction through further consolidation, standardization and process improvement. Some Type 2 Value will be realized as well through the consolidation and process improvement.
  2. Transition Focus to Types 2 and 3. This strategy is most appropriate for companies where Type 1 value is well-developed, but they have not yet focused on Types 2 and 3. Under this strategy companies heighten focus on Type 2 to optimize process integrity and begin to build skills, capabilities and demand for Type 3 Value services.
  3. Cost Minimization. This strategy is most appropriate for slow growth and commodity businesses where the primary focus and pressure is cost reduction. These companies may already have well-developed Type 1 value but need to continue to scrape away savings. These companies look to Outsourcing and Off-shoring for these further cost reductions. Type 2 Value is pursued as required by law, and Type 3 Value focus is discouraged.
  4. Focus on Type 3 Value. This strategy is most appropriate when both Types 1 and 2 are well developed. Although attention continues to maintain and improve Types 1 and 2 Value, there is a shift in resources to preparing for, identifying, and implementing Type 3 Value services.

Selecting an option that meets your business circumstance is key. Value in shared services can be created in multiple ways.