Moving to shared services has proved an increasingly popular model for HR departments looking to improve efficiency and reduce costs, but effective use of shared services requires careful planning. Angus Kidman identifies some of the key issues to consider and looks at how one global consumer giant has evolved its approach to shared services over the past decade
Moving to shared services has proved an increasingly popular model for HR departments looking to improve efficiency and reduce costs, but effective use of shared services requires careful planning. Angus Kidman identifies some of the key issues to consider and looks at how one global consumer giant has evolved its approach to shared services over the past decade
At first glance, the HR department looks an obvious candidate for a shared services approach, since it provides a natural match to many of the key attractions of farming out entire administrative tasks to an external organisation. “Benefits result from aggregated economies of scale or scope, the ability to negotiate from a stronger aggregate base and through adoption of streamlined, common business processes, particularly when significant simplification and standardisation are involved,” says Gartner analyst Richard Harris.
Shared services also become more attractive in a rapidly changing corporate environment. “Employee populations are growing increasingly complex due to multiple mergers, geographic distribution and swings in employment cycles,” notes HR analyst firm Best Practices.
IES Research Networks has identified three principal drivers for moving to a shared services approach: reducing costs, improving quality and effectively handling organisational change. All of these can provide a sensible motivation for considering a switch to shared services. However, years of experience suggest that shared services can frequently be problematic if not approached with caution. If you’re considering a move to shared services, be sure to consider these issues.
Make sure you gain cooperation from the IT department. External access to HR resources, whether in a shared services model or a fully outsourced arrangement, will be critically dependent on technology for service delivery. Technology isn’t the be-all and end-all of any shared service arrangement, but without an effective technology bedrock, service delivery is extremely likely to be compromised.
Ensuring this doesn’t happen requires cooperation. As Best Practices points out: “Outsourcing efforts by large companies commonly encounter resistance from operational areas that control core HR data systems and processes. Technology still plays a critical role in determining outsourcing possibilities.”
One key role that IT plays, which will ultimately benefit all participants, is simplifying existing infrastructures. According to studies by Hackett, companies that don’t attempt to reduce IT complexity spend 18 per cent more on HR services per employee. “The bottom line is simple: our empirical research shows that companies which embrace IT complexity reduction as a mission spend less across virtually every area of the back office,” says Hackett IT practice leader David Hebert.
When you do gain co-operation from the IT team, make sure you work jointly to plan and deliver the most relevant services. Even amongst companies with shared services arrangements, Deloitte’s 2005 Global Shared Services Survey found just 44 per cent offered employee self-service – one of the most basic of HR technology applications. Such obvious gaps can be avoided with careful and considered planning.
Don’t rely on contracts alone. While a well-defined contract is an essential requirement for any shared services arrangement, especially once which relies wholly on external suppliers, excessive dependence on the contract as an enforcement mechanism and relationship definer is likely to result in a culture of mistrust between the main company and its HR supplier. “The formal contract is an important foundation, but its benefit lies in setting the tone of the supplier/customer relationship, and developing a culture and understanding of mutuality,” say Gartner analysts Cathy Tornbohm and Claudio Da Rold in a recent commentary. And while it can be tempting to consider short-term contracts to maximise flexibility, the best financial options usually come from longer-term arrangements.
Identify specific services that could benefit from being shared; some common HR tasks provide clearer ROI than others. One example is handling leave of absence, an increasingly common requirement for retaining staff in a competitive environment. According to Best Practices studies, companies that outsource more than half of their leave of absence activities can reduce cost per leave by an average of 30 per cent.
It’s important to recognise that it’s not a question of all-or-nothing, and that moving to shared services won’t automatically allow you to make large-scale changes to the organisational culture. For instance, Deloitte’s survey found that 62 per cent of employee compensation in organisations relying on shared services relied on traditional, formal bonus programs, even though many such businesses planned to use other, less formal measures such as improved career progression as a means of inspiring and retaining staff.
Don’t assume you’re too small. While scale benefits from shared services will help cut costs in large organisations, for small-to-medium businesses, sharing provides a different benefit: access to specialist skills. According to Deloitte growth solutions partner Jeremy Bolt: “Mid-market companies determined to stay focused on growth, and not be distracted with onerous compliance requirements, skill shortages and risk management, will increasingly turn to external providers to supply a broad range of functions and services. Identifying and developing an enduring relationship with a good external provider is very much a growth enabler for the mid market.”
That conclusion is borne out by other data. In a 2004 US survey by the Bureau of National Affairs, gaining access to greater expertise was the top reason to use a shared provider, cited by 69 per cent of respondents.
Use shared services as a compliance enabler. New regulations such as Sarbanes-Oxley are impacting companies worldwide. The more tightly defined processes inherent in shared services arrangements can help make compliance with such financially orientated regulations easier. In one survey of 115 global companies by Deloitte, 80 per cent says that shared services arrangements simplified compliance, and 50 per cent say they reduced compliance costs.
As Deloitte noted in its survey: “Companies that find ways to make shared services work – addressing and overcoming the many people, process, and technology challenges that shared services can entail –are well placed to seize competitive advantage in today’s global economy.”
P&G cleans up its act
Global consumer giant Procter & Gamble (P&G) provides a textbook example of how a shared services approach to human resources can evolve over time. An analysis of the company’s strategy by Gartner in early 2005 identified two distinct stages: an initial reliance on three global shared services centres from 1998 to 2002, succeeded by a ten-year outsourcing deal with IBM to handle all core IT functions.
With more than 98,000 employees spread across 80 countries, achieving common benchmarks and driving down administrative costs posed a major challenge for the company. While the three shared service centres (SSCs) – located in Costa Rica, the Philippines and the United Kingdom – helped deliver a number of cost-saving benefits, they also created a number of challenges for P&G.
Gartner’s analysis of P&G’s operations identified five main reasons for the shift from an SSC model to a fully outsourced model:
• Limitations on the amount of optimisation that could be achieved using SSCs.
• Challenges in keeping service and infrastructure skills up-to-date in an SSC approach.
• Difficulties in justifying budget for new HR technology investments.
• Inability to sell services from the SSC to other companies.
• Need for ownership of HR products in order to sell HR more effectively to internal customers.
The switch to IBM came at the same time that P&G was re-examining its outsourcing arrangements in other divisions. Simultaneously, the company shifted most of its IT operations and a number of finance elements to Hewlett-Packard – a major global rival to IBM. P&G’s success in doing so suggests that companies need not feel compelled to shift all external services to a single provider simply to achieve scale benefits.
While the SSC model was superseded by the outsourcing arrangement, P&G was keen to ensure that the experience gained during its operation was not discarded. As a result, 750 members of staff from the three service centres were seconded to IBM at the commencement of the contract, ensuring continuity of knowledge.
Although the IBM deal has only been in place for a year, the company is already seeing significant benefits, particularly in the area of meeting service level agreements (SLAs). “From July to November 2004, IBM met all 21 SLAs, compared with the month before the deal took effect in which P&G’s SSC only achieved 9 out of the total,” Gartner wrote in its assessment of the arrangement.
Key issues for HR shared services
Career progression
Quality processing
Maintaining customer focus
Retaining talented staff
Performance management
Recruiting skilled resources
Ongoing training
Morale
Rotation of staff
Source: Deloitte 2005 Global Shared Services Survey
