(For non-Americans: “…for Dummies” is a popular series in which certain topics are explained very simply)

WHY SHARED SERVICES?

In today’s world every self-respecting multinational will consider Shared Services if only not to be left behind in the significant savings that are promised by this field. These savings are constituted by several cost reducing factors

1. Quality. Through centralization one can facilitate standardisation and uniformity. These are not always goals by themselves, but in the process of standardization it is discovered that the “unique” features required for a particular market often are nothing but a variation on a theme. When that insight is gained, standardisation will lead to simplicity, which in turn will lead to quality in execution. It is a long and arduous road, but it fundamentally leads to better and ‘cleaner’ processes.

2. Labor arbitrage. When the service is centralized, often a low-cost location is chosen. The initial and simple savings of labor arbitrage are evident but many overlook that there are 2 components to labor arbitrage: *first, there is the simple lower salary of a worker *second, when the processes are organized with Process Owners vs. Transaction Performers, one creates another salary differentiation between these 2 groups. The second savings is even more substantial when a different legal entity executes the transactions because the relatively high wages of the Process Owners do not infect those of the Transaction Performers as much. Often, next to a difference in direct wages, also secondary packages have significant savings potential.

3. Operational knowledge. Amazingly enough, HR Administrators – to take just one example and generalize away – have a pride in their profession, and they generally like to do their tasks well. Their main focus is on quality. Just as most Shared Services individuals are Transaction Performers who take pride in process efficiency. Regularly, 5% efficiency gains as very realistic. Recently I was told about a case where 10-15% efficiency gains were achieved within the first year, just because people were looking at the processes from a different angle. And yes, that operational knowledge is universal in the execution of HR, Finance or Customer Service processes. A ‘real’ operational manager from a Business Process Outsourcing or Customer Service organization will realize that the processes and skills at an ‘agent’ level are different depending upon the processes executed, but at a management level it remains a game of how many transactions did you execute at the right quality level. This is an expertise that requires experience to build up, and how many good process-experts can also manage a department?. (1 Horror story indicated a 90% loss of management during the switch from process knowledge-focus (which did not bring the performance) to operational management focus since these just could not fulfill the new requirements for the job.

4. A final reason might be ‘oligopolistic anxiety’. All multinationals are watching one another to see where they can learn. Consultants are very keen on making comparisons – against a fee of course – in which corporations can compare themselves against others, direct product competitors or not. In effect they are all competitors in the capital markets. If the industry is creating cost advantages, one has to go along, if only to show stockholders that one does everything possible to maximize their holdings.

HOW?

One topic that is often a point of contention is the way the organization should be structured: who should have the operational responsibility (and thus power)? To explain how it works let me use the example of a car factory, which is greatly simplified in the drawing below. On the one hand, we have the “Process Owners”, who design the car, set the quality standards and verify that the cars produced adhere to their specifications. Next to the qualitative aspects, they also are masters of the quantitative aspects: how many Type 3, and how many of those in white with leather upholstery and a 1.8i engine do we expect to sell? This also drives the Purchasing Department, who need to make sure that there are then sufficient 1.8i engine parts to produce to demand. In the perfection of their work, the interaction with the customer has been improved so that these days many factories are only producing exactly to customer specifications. Still, corporate forecasting and the decision of which types are available – with the corresponding price tags – is done by the sales & marketing departments.

Figure 1: A typical car factory

 https://peteralderliesten.com/wp-content/uploads/2015/05/typical-factory2.xlsx

Now, given the demand for x black BMW 3’s with configuration y, the operation takes over and starts ensuring that these cars are becoming a reality, within the time period and the quality specifications drawn up. For this task generally totally different skills are required than for designing these cars. The interaction of these groups is a typical functional matrix-organization.

WHAT

When we examine Shared Services, we see virtually the same kind of pattern. Grossly simplified: from a management perspective there is little difference whether one ‘produces’ a physical car, answers a telephone call, or processes an invoice for payment. The differences are the kind of people required and the corresponding equipment. The expertise in how to use the equipment is centralized in the process descriptions and working instructions by the Functional Department and the job qualifications of the employees. Interestingly enough, this is also reflected in both technology and reporting: Most telephone switches are made for calling somebody outside. An Automatic Call Distributor (ACD) is a telephone switch made for accepting telephone calls, is is the workhorse of customer service departments. Such an ACD is programmed – and produces reports – from 2 different perspectives: the first perspective is from the customer: how many calls were received and how long did it take to answer them? How many customers hung up the phone before a connection was set up, and how long did they wait? How long did the conversations last behind the number for sales and how long for after sales? The second perspective is from the people that work there to answer those questions: how long were they working? How many calls did they answer and how long did their calls take? Hereby it is possible – and recommended – that agents answer phone calls from multiple lines, making this functional matrix organization the challenge for the Operations Manager. This description also applies to e-mail handling systems etc. The first perspective is defined by the Process Owners, the second perspective is determined by the Transaction Owners, within the specifications set by the Process Owners.

CONCLUSION

Therefore, if the operation needs to be regionally organized, the Process Owners and the Transaction Owners report into a regionally responsible function. If the operation needs to work according to global standards, the most logical organization structure would have the Process Owners report into a centralized, global standard setting function, while the Transaction Owners report into a separate operational function to take optimal benefit of relevant expertise.

(Originally posted on November 25, 2014)