To share or not to share ... that is the question
What should we continue to outsource versus in-house?
When is our company large enough for a shared services model?
First Step: Proprietary vs. Outsourcing
Cost Savings vs. Increased Efficiency
While outsourcing has a measurable cost (20% potential premium) There also exists an offset of efficiencies gained which has the ability to mitigate that cost.
Example: A shared services company has several challenges; growth needs of the underlying companies being at the forefront. Your bandwidth to support, simply may not keep pace with the overarching growth of the organization. This can result in a constant distraction to leadership to compensate and keep up. Thus, leaving leadership in a constant flux of dealing with shared services as their primary focus versus growing the business which is the strategical objective.
Example: General Motors – The ‘strategic focus’ is selling cars and trucks – their actual business is that they are one of the world's largest providers of benefits. It takes roughly 8.5 months of selling cars and trucks (Strategic Vision) to pay all the retiree benefits, health insurance cost, etc before the company actually makes a profit selling cars and trucks.
The 2nd question is:
“when do we pull the lever?”
When is the scale of operation appropriate to move to a shared service model? This does not happen overnight – too often the vision of process falls prey to it being the vision of ‘now’ versus a vision of ‘tomorrow’. In other words, by the time you build it, its outdated. So, significant time and resources are allocated, only to find that “it’s back to the drawing board”.
What happens when growth turns to recession?
Another potential problem can be that when you journey through an economic downturn, you have this shared services company (and the expense there of) that is now completely overbuilt for what could equate to a year or more of cycle.
A value of the outsourcing model is that the ebb and flow of growth is easily and immediately managed. You can beef-up for a project and deliver for the customer without fear of sustainability for the new hires required internally to allow the same deliverable. If you were to accomplish the same with an internally sourced shared service model, and did not ‘beef-up’ resources, your deliverable suffers which could keep you from that next big contract.
Regardless of direction – a measurement (metric) must exist to measure the true cost of each shared service, the value gained by internal integration and finally the long-term cost (this is the hard one) of time and resources, leadership distraction, and potential exposure to economic irregularities. All of the above then must be examined through the microscope of risk management as I discuss next.
Second Step: Risk Mitigation, Compliance, Safety and Shared Services
Risk, Compliance and Safety are not an area for cost-savings ...
While outsourcing can make sense in some areas, it may not in others. Regardless of how the organizational structure is built and what is ‘in-house’ and what services are ‘exported’ to a provider – ALL levers will still require diligent oversight.
Unchecked; each of the service levers have the potential for costly mistakes and “brand damage” that can result in loss of revenue, clients, and future opportunities.
Each area of sourcing will require a deep dive into the feasibility of in-house vs outsource to determine the potential risk/reward.
A potential solution that can help mitigate risk while at the same time creating efficiency (plus allow a greater team collaboration) is creating a ‘dashboard’ that provides insight into key areas and metrics. This dashboard, when used effectively can be built in a way to segregate into groups, goals, and metrics that track the strategic initiatives of each division, company, etc. That data can then roll-up to a leadership dashboard at company level for senior leadership and then collectively roll-up to C-Suite to allow ongoing measurement of the key metrics within the strategic objective of the overall organization.
A big takeaway here is the ability track, test, and monitor to know exactly where you are in any given metric. This also allows you to quickly identify deviations and be able to adjust immediately to address or discover the “why” behind that deviation (this could be both a positive or negative deviation or the pinpoint of a new trend). This creates a limitless ability to scale and grow while greatly decreasing the constant need for travel and supervision. Accountability is built into the model, and then you manage the model. In essence you create a management style of collaboration where all involved can directly see how/where they are moving the needle and making a difference. While at the same time being self-policing of dysfunction and inefficiency. It becomes a true team atmosphere where everyone is rowing in the same direction facing the direction of travel versus having their backs towards where they are trying to go.
For this to work, the ‘dashboard’ must be simple to understand and simple to input data. A time requirement on input of not more than 10 min a day per user and typically no more than 4-7 total tracking points. The ‘dashboard’ should not become a job – just a valuable tool. Each area and each company will have a focus as the overarching strategic vision is pursued. It may be safety is a number one metric and that is the tracking goal on their dashboard. It may be logistics and updates on timelines/deadlines for another area. The bottom line is that each person in leadership will help build the key metrics based on the goals. But all metrics should feed and roll-up to supporting the 1-3 key objectives of each organization and ultimately to leadership.
Third Step: Cross-Functional Teams/Tools
How to pull it all together?
A shared services center has some additional challenges. Typically, we think of the obvious which is the logistics of how each services area will accept and route work. How to manage the quality of the requests coming in and a defined process for handling those requests. Next, there should be a defined process for ‘non-standard’ requests so that there is not a loss of time and efficiency due to a lack of process. Lastly, there must be a way to collect data (dashboard helps with this) to help create a path to continuous improvement as efficiency and service is the true “profit center” for a services division.
Most of the above is just common sense, but what is often missed is the potential loss of cultural alignment in the organization. Consider the common circumstances – First, this is typically a “new” division/company and as such, most of the employees are new as well. The idea of “shared vision” and “one culture” are difficult when doing that level of new on-boarding. To further exacerbate the situation, the group is often housed off site or a remote location, and potentially performed by people of much different backgrounds. Without guarding this potential culture pitfall, the organization could suffer in the areas of employee retention, productivity, morale – but since this is the “services front-line” it can cost you clients. Considering the large spend to create the shared services division and the goal of an added value proposition to potential new customers, any loss is clearly not the desired end result.
The following is an example of 4 potential metrics that might be the basis for a leadership dashboard in shared services – each shared services area would have their own dashboard (i.e. accounting, HR, compliance, etc. with potentially different metrics):
- “Net” Cycle Time — This would measure the time that a work product is within the control of the center. This does not include time that the work product is sent back out for approvals, clarification, additional information or other matters.
- “Net” Quality — This would measure quality control by considering both the lack of clarity (“Input”) of each work request coming in and measuring the errors created by the services area (“Output”).
- Strategic Alignment — Process owners often make decisions that they expect shared service centers to execute. It is insightful to understand how effectively a shared service center is carrying out that strategy, as it can have a significant impact on overall performance. Process should not be created and implemented without the input of the people actually tasked with implementing that strategy.
- Value Contribution — Measuring the value of shared services functions will help ensure the focus of these groups does not shift completely to other considerations, such as efficiency at the expense of their purpose.
Fourth Step: Timing
When to pull the trigger?
How to manage the migration?
With any change in service from in-house to out-source and vice versa, the customer is typically not receptive to a “drop-off” in performance and deliverables. So, managing expectations has to be at the beginning of each strategy conversation. Expectations from the customer, expectations of the actual integration team and the parties involved, leadership, as well as the client facing relationship managers is all key in the execution phase.
Cost or Efficiency — One of the goals in a shared services organization is to be “market-competitive”. I would think of this both in terms of cost but also in terms of deliverables. We know that cost is only an issue in absence of value. However, the value is in the perception of the buyer not the seller. So, it only matters what the client thinks, regardless of how proud we are of our “product”.
One example in metric comparison may be to calculate “cost per work unit” as a sustainable evaluation tool — for example, the cost to produce an invoice — should be considered and compared to what the cost to outsource that same task would be. This can act as a checks and balances to the overall operation and lead to a better understanding of the actual value proposition in each services silo.
Shared Services Potential Value
I. Insight: Value added by analyzing data to increase revenue and decrease cost
a. Create efficiency with the ability to scale that efficiency across all divisions
b. Reliability of data for better decision making
II. Simplification: Value added by ensuring positive customer experience
a. Ability to create timely execution
b. Leverage existing technologies
III. Reliability: Value added by meeting a client need at a competitive cost
a. Potential to minimize risk and losses via internal quality control
b. Promote collaboration across all divisions and companies
Tim Lofton is the Managing Partner for Cornerstone Consulting Group