Opportunities for Action. Shared Services in Operations and IT: Additional Complexity or Real Synergies?

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1 Opportunities for Action Shared Services in Operations and IT: Additional Complexity or Real Synergies?

2 Shared Services in Operations and IT: Additional Complexity or Real Synergies? In recent years, many companies have significantly improved the efficiency of both their operations and their information technology functions. Few, however, have taken the next step and exploited the synergies that can be developed by restructuring the relationship between these two functions. Yet the potential synergies are considerable. In many companies, operations and IT are effectively separate entities. True, they serve the same constituencies, and their staffs often report to the same executives. But their organizational structures, governance mechanisms, and channels of communication are seldom truly integrated. This translates into redundant platforms, higher interface costs, frustrated business users, unnecessary initiatives, and missed opportunities to leverage economies of scale and share best practices. But a few leading companies have found an innovative way to improve the situation. By integrating operations and IT into centers of processing excellence (COPEs), these companies have driven costs down significantly, created a user-friendly interface between the business process architecture and business users, eliminated redundant platforms, and improved the overall quality of service and delivery across their organizations. Lost Opportunities The traditional relationship between operations and IT is far from optimal. Individual business units typi-

3 cally have their own embedded subscale processes and systems, which prevent the company from leveraging internal volumes. At the same time, processes spanning multiple business units have no single, accountable owner, so there is no one pushing for overall efficiency. Cross-unit coordination between operations and IT with their separate, insular cultures is limited, creating navigational challenges for business users. The result is higher costs, systems fragmentation, lack of attention to the maintenance-cost iceberg, and limited sharing of best practices. A U.S. financial-services company is a case in point. The company had strong securities-processing capabilities, which it had developed into a thriving business serving external asset-management firms. Meanwhile, the company s retail and institutional asset-management operations had their own adequate but separate and less efficient versions of those same processing systems. The managers of the internal asset-management operations recognized the irony but were unwilling to relinquish control and adopt a new system, arguing that it would be foolish to tamper with a proven model. As a result, there was no sharing of platforms or best practices, and the company was losing opportunities to leverage internal economies of scale. Unfortunately, this company s situation is typical rather than unique. Indeed, it is much harder for most businesses to contract out processing operations from one part of the organization to another than to a third party outside the organization. The traditional relationship between operations and IT can also lead to poor investment decisions. Lacking a dedicated owner to champion them, opportunities to optimize key companywide processes typically get voted down in favor of revenue generation initia-

4 tives, even though the former may offer a larger payoff. In addition, decisions involving operations and IT tend to get made too high up in the organization at the COO and executive committee level resulting in lengthy decision making, inefficient use of top managers time, and, ultimately, more missed opportunities. A Better Alternative Integrating the operations and IT functions into COPEs addresses these issues in two ways. First, it bundles similar processes used throughout the company, enabling business process architects to design efficient and robust versions that can serve all the business units that need them. With related activities consolidated within a single COPE, the organization can eliminate redundancies, harness potential synergies, and achieve economies of scope and scale. Because of their size, COPEs also have the resources to drive process automation to the next level. (See the exhibit COPEs Maximize Efficiency by Consolidating Related Activities and Integrating Process Management. ) Second, COPEs improve performance by vesting ownership of operations and IT in a single entity. This ensures process and system consistency and adherence to the agreed-upon business architecture. The arrangement is also business-user friendly, providing a single interface and immediate accountability. With COPEs in place, business users no longer have to navigate and coordinate operations and IT to support a new initiative. Instead, businesses define their needs, and the COPEs design and execute the associated delivery processes and IT systems. The single-owner structure has other benefits as well. It maintains a clear distinction between those

5 COPEs Maximize Efficiency by Consolidating Related Activities and Integrating Process Management COPEs Consolidation of activities Integration of process management Operations are consolidated across business units into enterprisewide processes, resulting in substantial cost benefits: Economies of scale Sharing of best practices A higher degree of automation Delayering The scope of processes is expanded to cover complete back-office functions: Integration of related processes and IT development Consolidation of operations and IT budgets into a single entity SOURCE: BCG analysis. in the organization who focus on generating revenue and those who focus on enhancing margins by delivering and optimizing related processes. With a dedicated owner at the helm, a COPE has the power to standardize systems and processes across business units, reducing complexity and costs. Furthermore, it can optimize total spending on operations and IT. The head of the COPE, who is responsible for the full set of costs both run-the-company costs (day-today processing) and change-the-company costs (business architecture and systems development) has a unique vantage point from which to manage the necessary tradeoffs. The Financial Return The bottom-line benefits of COPE-driven shared services in operations and IT can be substantial. Indeed,

6 we believe that savings equivalent to 20 percent of the total addressable cost base are possible for many organizations. For others, the savings will be even more significant. In one organization, multiple groups worked on behalf of several business units on general ledger reconciliation, suspense account management, intercompany reconciliation, accounts payable, fixed-asset accounting, and reporting in essence, a collection of overlapping cottage industries that generated duplicative and fragmented processes and unnecessarily high costs. To remedy the problem, the company established a finance COPE, which centralized finance operations across the enterprise, established common processes and standards, and rationalized and consolidated the supporting IT platforms. The company expects to realize a savings in excess of 35 percent as a result of this initiative. Another company used a COPE to optimize the performance of its call centers a critical link in its customer-care and revenue-growth strategies. The COPE facilitated the delivery of high-quality, segment-specific services (from basic transactions to premium customer care), which the organization had long viewed as imperative but had been unable to achieve. The COPE also helped the company optimize its use of technology and better manage and monitor staff performance. The company expects this effort to translate into a 15 to 25 percent boost in margin contribution as well as a dramatic improvement in customer satisfaction. Getting Started Achieving a COPE-driven, process-centric organization is worthwhile but is not an easy task. In addition

7 to the logistical challenges, it requires a significant shift in mindset across the organization, as well as effective governance and change-management processes. The following six steps are necessary to get the process going: Conduct a high-level assessment of the potential impact of COPEs on the company s business model as well as of the potential savings, efficiency gains, and service-level improvements that could be achieved. Secure the commitment and explicit support of the CEO and the rest of the executive management team for the effort. The importance of management s commitment and support cannot be overstated. Commission a companywide, CEO-sponsored study to determine the number of COPEs that should be established and the processes and activities that should be assigned to each. Identify the maximum number of layers for each COPE and appoint the necessary personnel, specifying mandates and span of control for each position. Designate an overall operations and IT leader, whose role will be to maximize value by coordinating activities across the COPEs. Simultaneously, define governance mechanisms for enterprisewide project prioritization, portfolio funding, and interfaces between the COPEs and the various business units and functions. Establish a strong transition-management office, which will expedite issue resolution, manage critical interdependencies, and monitor overall progress. Office staff should report directly to the CEO and executive management.

8 Emphasize effective and consistent communications and ensure that the new culture and desired behaviors are constantly reinforced. * * * Centers of processing excellence can transform your enterprise. They can substantially reduce costs and allow your company to fully leverage economies of scale and streamline its internal processes. And they can improve performance by providing business users with a single interface and point of accountability. If you are eager to take service delivery and process efficiency to a significantly higher level in your organization, COPEs are a vehicle you need to explore. Antonio Riera Harold L. Sirkin Rainer Minz Antonio Riera is a senior vice president and director in the Boston office of The Boston Consulting Group. Harold L. Sirkin is a senior vice president and director in the firm s Chicago office. Rainer Minz is a senior vice president and director in BCG s Cologne office. You may contact the authors by at: riera.antonio@bcg.com hal.ops@bcg.com minz.rainer@bcg.com This article is the result of a joint research initiative by BCG s Operations and Information Technology practice areas. For more information on the findings, please contact the authors. To receive future publications in electronic form about this topic or others, please visit our subscription Web site at The Boston Consulting Group, Inc All rights reserved.

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