March 2008 Shared Services and Outsourcing Evolution Into a Hybrid Model By Bill Frech Partner & Managing Director, CFO Services North America TPI CONTENTS 2. Introduction 2. Background 3. A Hybrid Model 3. Governance in a Hybrid Environment 4. Effective Shared Services Managers 5. Conclusion
INTRODUCTION For more than two decades, companies competing in the global economy have continually refined how to best meet their corporate goals agile management, operational efficiency and cost control while ensuring that their organizations added customer value. For functions perceived as non-core to the business, companies have generally tried what originally seemed radically different approaches to improving these operations either internal shared services or external outsourcing. Most recently, companies have learned that these approaches are not radically different; instead, they are closely related. Both approaches use some of the same tools, methodologies and steps toward improvement. Today, organizations are combining these two operating models into a flexible, new hybrid that reduces risk and cost while further maximizing benefits such as improved leveraging of capabilities and expertise and enables the company to extend service into new areas by providing improved service levels, responsiveness and adaptability. The hybrid gives a company the flexibility to determine what should be outsourced and what should be kept in house a company can adjust its business approach to run a shared services model like an internal service provider; and when it is more advantageous, a company can select offerings from outsourcers. This paper examines the steps leading to the development of this hybrid and discusses its essential characteristics. The paper also suggests specific actions that your company can take to fully exploit the potential of this operating model and helps you assess which way your company is leaning and why. BACKGROUND The concept of shared services blossomed in the 1980s when companies like GE and Digital Equipment Corporation led efforts to standardize systems and business processes and to drive cost reduction. Shared services continued to expand and evolve through the 1980s and 1990s, incorporating good business practices such as Six Sigma, service level agreements and chargeback for services. As shared services and outsourcing delivery methods developed, they frequently traveled down separate and distinct paths, primarily for philosophical rather than practical reasons. Although both methods delivered similar services in a comparable fashion, their respective proponents viewed them as markedly separate solutions. For example, the majority of attendees of shared service conferences in the mid 1990s commonly viewed outsourcing of operations as sacrilege, especially if a shared services operation could perform the function. However, during the past few years, many companies have overcome this philosophical impasse and are realizing tremendous benefits through implementing a hybrid approach that exploits the best of both sourcing options. They can use outsourcing to harness the skills of professionals who are expert at standardizing and transforming routine transaction processes; and they can use shared services to transform and standardize processes the company views as too risky or too core to outsource. Further, in a hybrid sourcing model, the shared service organization functions as the perfect home for the organization, governing both shared service and outsourced operations.
A HYBRID MODEL The hybrid model reflects how shared services and outsourcing have evolved from an emphasis on cost reduction to one of process transformation an evolution that reinforces the organization s efforts to support business improvement and globalization. TPI has observed this development during the past five years. In particular, we have noted that companies have come to realize that selectively outsourcing transactional work that was not unique to their business or that had already been outsourced by others in their industry was often the most astute and least risky course. A new best-of-breed model was emerging in a shared services / outsourced context. This insight also aligns with TPI s awareness that outsourcing deals are becoming smaller, enabling clients to test the outsourcing market by outsourcing one process area (e.g., Accounts Payable), while moving a more sensitive process to a shared services operation. Using this approach, the client can outsource noncore areas, achieving the benefits quickly and achieving a solid record of successful outsourcing, while simultaneously improving and adding rigor and control to more sensitive processes. Companies have expanded on this approach further by taking activities that could be standardized across the company, outsourcing the routine work while moving to a shared service center the areas that are core or vastly different among business units. Within the Order to Cash function, for instance, a company could outsource accounts receivable and credit-checking operations but establish a shared service organization to perform the customer interface operations of order-taking and collections. In a dynamic hybrid model, the client might take the next logical step and continue to standardize and document the retained order to cash processes within the shared services operation and, eventually, outsource these process areas after standardization. TPI s deep experience with all sourcing solutions provides a distinct perspective into both internal and external (outsourced) operating models. Best practice shared services is much more than just consolidating similar activities or centralizing them in one location to facilitate efficient internal operations. We have observed that the most successful shared services operations must be organized and run like a business whose objectives are market competitiveness in pricing and service and responsiveness to customer needs. The company adopting this approach will deliver the quality services required to support the business through a sourcing strategy that combines the best internal and outsourced service delivery capabilities under a single governance structure. Clients considering the implementation of a hybrid model must ensure that their shared services operation has the following characteristics: Clearly defined governance structure Clearly defined processes and process boundaries Well-defined and meaningful service level measures Business-oriented management GOVERNANCE IN A HYBRID ENVIRONMENT Governance is a critical component of the hybrid model. In general, the governance structure for a shared service organization is very similar to the governance organization needed to work with a service
provider. Therefore, a combined governance structure resident in the shared service organization is a natural fit that should enable management to oversee relations with the outsourcing provider(s), administer internal shared services and support its customer base. Here is a likely scenario of how the governance organization evolves. A company that outsources an IT component develops governance associated with the IT organization. If the company decides to outsource Finance & Accounting (F&A) processes as well, its next logical step would be to combine the governance structures for F&A and for the outsourced IT component. Whether or not the IT provider and the F&A provider happen to be the same provider, the two interact and the areas of interface must be managed consistently. Finally, in this scenario, the result is that the company may have a shared service organization that supports parts of F&A or IT, and that both the shared services group(s) and the outsourcing provider(s) must interact with F&A and IT customers. The combined governance function provides significant value: it facilitates consistent and efficient interaction with the customer base; and it ensures that communication with, and management of, the internal shared service center and the provider(s) are handled consistently, with the touch points between IT and F&A more effectively managed. EFFECTIVE SHARED SERVICES MANAGERS Hybrid shared service staffing should include the following roles: shared services managers to oversee the operation; functional managers to run the internal operations; contract managers; customer liaisons who understand customer needs and service issues; project managers to manage internal, external and combined transformation efforts; and financial experts to review the vendor charges and establish and calculate internal chargeback. The hybrid shared service manager plays the most critical role, ensuring that the operation is successful and that business benefits are obtained. Hybrid shared services managers must possess the same competitive characteristics as any business owner who provides quality customer services. Successful hybrid managers must be adept at managing large and diverse internal operations as well as outsourced service providers. They serve an equally important function as change agents who can educate their client business units about the value and mechanics of transforming, outsourcing or insourcing a process or function. Reporting structure is another vital factor in guaranteeing success. Hybrid managers must occupy a strategic place within the organization s reporting structure. This role will enable them to understand business unit needs and priorities and to fairly represent these needs against competing requirements from all parts of the company. Reporting structure must also position them organizationally so that they are not perceived as belonging to one function within the company. Once an organization operates an effective and efficient hybrid model, companies typically expand the scope of services into other business areas, including support of areas in the company s commercial or revenue-generating operations. Because this hybrid model is evolving, it poses a formidable challenge to those who must manage it. For most companies, a very small pool of internal leaders exists usually within the operations side of the company with the experience and qualifications to fill
this role. It may be difficult to convince someone with this skill set that a good career move is to assume responsibility for implementing this hybrid. Some companies are experienced at promoting their managers and guiding them along this development path; others are just beginning to learn how to develop qualified managers a challenge they will need to meet to compete effectively in a global environment CONCLUSION The hybrid model offers an organization optimum benefit from using a combination of external and internal solutions. To obtain the greatest advantage from the hybrid, companies must maintain a solid, experienced management team, support processes for communicating and managing service relationships inside and outside the enterprise and sustain clear goals and a strong customer focus. In various client engagements, TPI has applied its expertise to support multiple function assessments and design, through to the implementation of sourcing solutions and their ongoing management. Typical client scenarios include: Clients may be operating shared services organization or operating in decentralized environments and are seeking for sourcing strategies. TPI works with these client executives to assess needed sourcing programs and collaborates with them to define the best sourcing strategies for their organizations. Then, TPI often teams up with them to put the model into practice. Clients are already operating a hybrid model and are seeking advice on how to improve their operations or are considering bringing more areas into the scopes of services provided. In these instances, TPI provides the skills and experience the clients need to expand their structures while ensuring that controls are in place and risk is reduced. To benefit from a sourcing strategy such as the hybrid model, companies must lay the proper foundation with clear goals and objectives and a solid plan. The risk-benefit equation with a hybrid depends on a company s internal evolution, its ability to make informed business decisions and its commitment to managing the process. LOOKING FOR A STRATEGIC PARTNER? TPI s Shared Services experts can help you achieve your organizational goals through objective advice, knowledge of your industry and experience with sourcing arrangements from simple to complex. Looking for a strategic partner? Contact Bill Frech, Partner & Managing Director, CFO Services North America, TPI, at +1 610 772 1101 or bill.frech@tpi.net. For more information, visit www.tpi.net.
ABOUT THE AUTHOR: Mr. Frech is a Partner and Managing Director of CFO Services in North America. An accomplished finance and accounting and information technology (IT) professional with considerable experience in Australia, Canada, China, Europe and Poland, Bill advises TPI s clients on a wide range of aspects related to their sourcing alternatives, providing expertise in evaluating, negotiating and implementing service agreements for large, multi-national corporations. His knowledge derives from practical experience in leading transaction efforts for multi-billion dollar transactions and leading due diligence for global acquisitions. Prior to joining TPI, Bill worked at Capgemini in several senior management roles, including Vice President of North American Business Process Outsourcing, Vice President of Shared Services Consulting Asia Pacific, Partner and Chief Operating Officer Joint Venture (for a client in Hong Kong), and Senior Manager of Support Services. In these roles, he led sourcing transition efforts with TXU and HydoOne, formalized Capgemini s global delivery model around three key global centers in Canada, Poland and China, and led the due diligence for the acquisition of Capgemini s global business process outsourcing delivery center in Eastern Europe. In addition, he defined global offerings, worked with industry analysts, directed marketing collateral development, and defined tools and methodologies. Bill holds a Bachelor of Arts degree in Biology from the University of Rhode Island and a Master of Science degree in Marine Science from the University of South Carolina. ABOUT TPI: TPI, a unit of Information Services Group, Inc. (ISG) (NASDAQ:III) is the founder and innovator of the sourcing advisory industry, and the largest sourcing advisory firm in the world. We are expert at a broad range of business support functions and related research methodologies. Utilizing deep functional domain expertise and extensive practical experience, TPI s accomplished industry experts collaborate with organizations to help them advance their business operations through the best combination of business process improvement, shared services, outsourcing and offshoring. For additional information, visit www.tpi.net. Americas Nigel Jones Manager, Business Development +1 650 384 5405 or nigel.jones@tpi.net EMEA Denise Colgan Marketing Manager +44 (0)1737 371523 or denise.colgan@tpi.net Asia Pacific Arno Franz Partner & Managing Director, Asia Pacific +61 (0)2 9006 1610 or arno.franz@tpi.net