The inherent limitations of a piecemeal Shared Services & Outsourcing (SS&O) approach

There is substantial evidence in support of the fact that a piecemeal approach to SS&O only yields limited benefits. By highlighting these limitations, we shall make the case for an integrated approach.

Today, companies are looking at ways of reducing the cost of non-core services, and they are arguing business volume to get further reduction in fees. They typically have a large number of service providers, which is partially a consequence of the piecemeal approach, resulting in the increased administrative burden of having to deal with all of them.

The last decade saw companies focus on cost reduction, and the ability of procurement departments to squeeze the very last penny off service providers was largely applauded. The downside of this cost reduction era is the meager scope for further cost reduction today. However, if we focus on the quality of the administrative spend– one realizes that too much of it is simply being spent in wrong and fragmented ways. For instance, the rigid task-based approach to SS&O can no longer provide the agility levels required by modern corporate strategies. There needs to be a total rethink of the approach to SS&O, and our stance is that companies need to move towards more integrated business models, where service providers would be evaluated (and rewarded) on their ability to change in accordance with the changing circumstances of their clients.

Traditional SS&O: Administrative burden shifted as opposed to lowered

Whatever motives companies may have when they adopt a SS&O model, the first critical metric they must achieve is the cost saving that formed the business case behind the initiative. “These cost saving targets are being met – and being met well, with over 95 percent of current outsourcing clients viewing their engagements as effective for reducing their operating costs.”

When re-evaluating budget allocations to decide on new technology and business processes, many conglomerates are running into a medley of uncoordinated, suboptimal SS&O arrangements to which their disparate businesses and functions have previously committed. Managing disconnected shared services, existing outsourcing contracts with limited flexibility and large service providers with diverging motives is a significant challenge.

A further challenge is to unwind from the previous outsourcing contracts entered into on a piecemeal basis, and change the operating model to one which dovetails better with one’s corporate strategy.

Stifled organisational innovation

Driven by the need to make dramatic improvements in costs, but without forethought as to the alignment of corporate strategies, most existing outsourcing contracts and shared service functions are dead ends. The service providers have little motive to provide innovations, and may lack the ability to do so as they were likely never selected on the basis of having this capability. “This is the “same mess, for less” quandary in which IT organisations grapple with a wide variety of Application Development Maintenance (ADM) and infrastructure vendors doing the same work as internal organisations previously did”.

Administrative and operations areas managing customer service, finance and accounting outsourcing (FAO), human resources outsourcing (HRO) and back-office processing service providers are all supposed to be working in the same direction, but do not always have the necessary interfaces to work seamlessly.

Lack of common focus

Senior executives also discover a variety of issues underlying their organisations’ SS&O efforts that are due to the lack of an integrated governance team vested with due authority. These issues often include:

•  Functional shared service centers that inhibit crossfunctional synergies.
• Business cases were at times vague and no longer managed, while a series of piecemeal changes and delays in execution have eroded the value and focus of the initial strategy.
• A true governance team does not guide the use of integrated business services - including opportunity assessments, service provider selection, performance management and best practice on communications, transitions and retained organizations – within the enterprise.
• Internal management teams are not managing the service providers well, and rarely follow any common approach.
• Only a few organisations use strong change management methodologies, and as such do little to prepare their corporate cultures for outsourcing. This often results in ripples of resistance post-outsourcing.

Applying the lessons learnt to Mauritius

Mauritian businesses considering an SS&O arrangement should therefore preferably be doing so in the context of their wider coporate strategy. However, the independent, hard-nosed perspective that executives need to make decisions about a company’s businesses is often elusive. Such decisions cannot be delegated to the business units, whose managers have competing inte rests and may lack a corporate-wide perspective. Nor can it be folded into the existing strategy process, which is frequently a bottom-up, business unit oriented exercise that starts with the assumption that each unit’s claims on capital and resources won’t differ significantly from year to year.

Top management teams have the potential to cut through the tensions, lobbying, and logrolling that often bedevil resource allocation discussions and lead to inertia. But few are well organized to play this role. We often see corporate headquarters housing a collection of central functions (such as treasury, legal, and human resources) that don’t fit elsewhere in the organisation. There are other positions at the headquarters that focus on strategy, but the incumbents primarily prepare board papers and support special initiatives for the CEO, the Chairman, or the Board. At the opposite extreme, certain corporate centers meddle in the tactics of business units. Too often missing are the intense reviews, debates, and challenges that lie at the core of value-creating corporate-strategy decisions.

In the next article, we shall study the enhanced value that results from an enterprise wide, coordinated SS&O approach.