Shared Service : The Logic Step to Outsourcing

Blending shared service strategy with outsourcing statergy seems to be a win-win move in today's fast changing environment. Where investments in technology and organizing into shared service can streamline processes, make cost more transparent and leverage technology to enhance service delivery, they also prepare a company for an outsourcing transactions. The better managed the shared service environment, the better positioned it is to manage relationships, set expectations, and make the transition to outsourcing less painful.

Shared Service : The Logic Step to Outsourcing
By David J.Dell, Ph.D. and Yuliya Tsaplina

Three great trends have been transforming the transactional work on HR in large organizations: information technology, centralization into shared service, and outsourcing. All there:

> Entail substantial effort to standradize the underlying processes of service delivery;

> Tend to decrease the face to face interaction between employees and HR clerical practices; and,

> Can bring significant cost savings.

Only a few years ago it was common to hear that reorganization into shared service with technology investments and process standardization brought savings that would make any outside vendor uncompetitive. However, findings from a study we conducted for the conference Board provided the first evidence that the shared service environment provides an optimal way to interface and manage outsourcing.

Three Scenarios for shared Service and Outsourcing

We can look at the interface of shared service environment with outsourcing under threee common scenarios: as an enabler for outsourcing, as an alternative to outsourcing, as a holding pattern.

Scenario 1: Shared Services as an Enabler for Outsourcing

The first scenario projects shared service as a way of enabling outsourcing by organizing HR to put in place the prerequistes for an outsourcing deal. The consensus among outsource providers, consultants, and companies that have gone through the process is that the key to the success of an outsourcing relationship is a through understanding of one's own internal costs, service levels and capabilities. Thus, a well-prepared outsourcing plan starts with a through understanding of internal costs and processes. However, in large decentralized organizations parts of HR may reside in business units and use different processes which makes it nearly impossible to build a solid baseline case. The move to a shared service center (SSC) creates a focal point of responsibility for HR services by pulling responsibility for HR transactions from the business units, standardizing processes, allowing HR to get a better grip on the costs, and using technology to automate of sservices more cost effectively.

The shared service model is appealing to vendors as well. There is a singlr customer that can make a meaningful deal, requirements are likely to be well understood, there are fewer unrealistic expectations, and is possible to build a bussiness case using base line costa and service measures that are already being reported.

Scenario 2 : Shared Services as an Alternative to Outsourcing

The Second possibilty is the introduction of shared services as an alternative to outsourcing. When HR is considered a core competency, outsourcing may not be an option. Still, HR is under significant pressure to cut costs and deliver services at a level comparable ti what is being offered on the outsourcing market. This competition creates the incentives to move to a shared service model. When combined with the intangible benefits provided by HR services internally and with the costs of transition, reasonable technology enablement can provide a company with a business case that seems competitive wth what they can expect from outsourcers.

Unless outsourcing providers achieve all expected synergies from technology and get the economies of scale from serving the needs of numerous customers, they may not always be able to do better than inhouse SSCs and still make their expexted profit. However, the economic odds keep shifting in favour of the outsourcers. As we concluded in another study,outsourcing vendors can spend the money to move offshore keep on investing in systems because they only make profits if they become more efficient; most HR departments cannot match the technology investments when they are competing for dollars internally, and they cannot reach the scale needed to manage offshore services.

Scenario 3 : Shared Services as a Holding Pattern

Finally, many companies are following the route of "shared service first, and then we'll see." In an attempt to get the best deal possible and reluctant to let go of control, many companies decide to introduce a shared service center first, and then continually track the market to see if any outsourcing providers can offer a better value. The move to shared services depersonalizes HR, making it less of a culture to outsource later on. Companies that outsource, having gone through shared service first, may face less resistance from line managment and employees.

The assessment of the success of shared service take time. Companies usually need two to three years of operations before they can fully appreciate the advantages and the drawbacks and decide what the next move should be. Rather than rush to an outsourcing solution companies are achieving the cost savings and leveraging internal capabilities to position themselves to either retain the processing inhouse or outsource in the future. Once the savings from SSC are achieved, an outsourcer has to have a very good value proposition to justify the change.

Key Drivers for Shared Service and Outsourcing

Most companies are driven to HR outsourcing by the need to cut costs,improve levels of service,avoid capital investments in technology ,meet changing needs,and attain more flexibility in HR.However,companies that have introduced shared service models

>SSCs have consolidated many HR expenditures so the company can have much greater visibility into the true costs of technology and other components of service delivery.

>HR a can more easily see HR as a cost center that can be reduced as a single line item.

>The service delivery of functions tends to be measurable and can be compared to the SLAs offered by external providers.

Key Chalenges in Moving to Shared Service and on to Outsourcing

Whatever provides the original push to move to a shared service ,the process is not easy and requires commitment at the top of an organization and allocation of significant resources.The required investment across three functions --HR,IT and finance--can run into hundreds of millions for large global companies.A move to a shared service model often accompanies significant investment in IT.There are political and financial costs of change.Business units try to optimize servicers for their own needs and may meet any attempts to change the status quo with resistance.The process needs to be driven by HR that should try to enlist the support of top and line management.Even with everyone pulling in the same direction,move to a shared service model will require a significant change managemnet effort.

One frequently cited concern by HR professionals is that by taking HR out of the business units and severing personal links that exist between employees and HR personnel,shared services may make it more difficult to deal with unusual and unexpected situations and generally make the system less flexible.For example,there are times when people have to rise above the routine-- the unusual and exceptional require flexibility that is comming from the sense of teamwork that may be lost.However,when implemented well ,shared service centers do provide efficiency and opportunities to introduce best practices. After the initial transition period that requires a great deal of attenion to change management, employees adjust to using self- service more and show high levels of satisfaction. In some companies, the satisfaction levels achieve 4.5 on a five-point scale.

The decesion to outsource or move to a shared service center is never an easy one. Both require significant investment of resources and may lead to a potentially disruptive change. However, companies are forced to consider these options to stay competitive. HR is in transition and it needs help in the decesiion whether outsourcing can deal with the key problems facing the HR executive today, such as:

> Improving corporate- wide HR standard processes and service delivery,

> Settings and executing HR technology strategy,

> Dealing with scare capital for HR initiatives,

> Facing pressure to perform at lower cost, and

> Dealing with internal politics and resistance to change.

alignedcurrent, and knowing what the vendor can afford to negotiate.

Conclusion

Reorganization into shared services is a good indicator of success in outsourcing. It allows a company to reap the rewards to a fuller extent and thus attain higher degree of satisfaction with the outsourcing relationship. From our survey, with only one exception,companies that have reorganized into shared service expected to outsource more functions in the future. Here are some additional reasons why:

> Companies without a shared service center are forced to demand a more customized and likely more costly approach from vendors because they lack standardization. Shared service organizations have done more to standardize, making it easier to move to or provide interfaces to the provider's model.

> SSC depersonalizes HR service delivery, so many of the change managment issues of moving to an outsource are invisible top managers and employees outside of HR.

> Companies with a shared service cenetr are more likely to build an inhouse competency specialized in managing vendor relationships, both in HR and across the company. To build such team competence, companies with shared services centers are also more likely to have resources to hire aditional staff.

> Today's shared service operations are operating more like business units than most traditional HR functions. They are measured for service and held accoutable for costs. They are familiar with holding others accountable, as well.

Blending shared services strategy with outsourcing strategy seems to be a win-win move in todays's fast-changing environment. Where investments in technology and organizing into shared services can streamline processses, make costs more transparent and leverage technology to enhance service delivery, they also prepare a company for an outsourcing transaction. The better managed the shared service environment, the better positioned it is to manage relationships, set expectations, and make the transition to outsourcing less painfull.

HRTech Team continually tracks the key issues and benchmarks in HRIS staffing, outsourcing. We welcome your comments and suggestions for future topics. We can provide support for your business case through customized benchmarking and ROI analysis. Please contact :: research@hrtrchteam.com