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ERP Guide : Shared service centres

Tutorial by:Gitika Pandey      Date: 2016-05-20 03:05:49

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A shared service centre is a profit and loss responsible unit within a parental company, governmental organization or not-for-profit institution, whose mission is to deliver specific specialized services to the operational units of its parental organization at a transfer price and on the basis of an agreement

[Strikwerda, 2004].

The definition shows that a shared service centre differs from other organizational units. Firstly, the shared service centre is profit and loss responsible. It is therefore different from a staff department in a traditional centralized or decentralized organization, which does not have a profit and loss responsibility and whose costs or revenues are directly let through to business units, organizational units that do have profit and loss responsibility. Despite its profit and loss responsibility, a shared service centre is also not a business unit. A business unit operates on the external market, while a shared service centre offers its services to the internal operational units only.

Furthermore, according to the definition used in this chapter, the shared service centre is a unit within the parental organization. Other definitions of shared services also encompass services fully delivered by external parties. In this chapter however, the shared service centre is assumed to be part of the internal organization. This does not mean though that the shared service centre has to produce all services itself, but it does mean that the profit and loss responsibility lies with the management of an internal organizational unit.

Lastly, the specific specialized service offer characterizes a shared service centre. There are no limitations for the services in which a shared service centre specializes, but mostly shared service centers provide services in the secondary processes of the value chain: accounting, human resources or information technology services. However, shared service centers that provide services for primary processes like customer service or telesales also exist.

Several authors describe the reasons for organizations to establish a shared service canters [Schulman et al., 1999; Strikwerda, 2004; Janssen & Joha, 2006]. Some of these reasons are mentioned more than once:

 

  • Cost savings and cost transparency: shared service canters give the opportunity to concentrate services. Instead of fragmentation of work over many people in various operational units, the work in a shared service centre can be concentrated and the processes can be streamlined. Reduction of fragmentation in this way leads to cost savings. It also improves transparency, as employees in operational units no longer have a high number of small tasks, and the services of the shared service centre are well-denied and mapped out. Cost savings can be significant, and can vary from twenty-five to fifty-five percent [Wilson, 2004].
  • Higher service quality and continuity: in a shared service centre, the supply of services is concentrated, which allows employees to specialize in certain services. Competence canters can be created, and the backup in case of illness or other absence can be improved because of the larger critical mass. As a result, a shared service centre can offer services of higher quality and higher continuity.
  • Clear management focus: in the operational units as well as in the shared service centre, management can focus on its core business. The management of the shared service centre has to concentrate on the quality of the services supplied, and on controlling the costs of these services. As a profit and loss responsibility has been agreed, this requires more entrepreneurship than in a traditional centralized or decentralized staff department. If the shared service centre performs better than agreed, it can make a profit, which could be used in bonus schemes of the management and employees, for additional investments in the shared service centre’s facilities, or for training and education of its employees.
  • Flexibility in setting up new business units: when an organization that has implemented a shared service centre wants to set up a new business unit to serve a segment of its external market, not all processes and activities for that new business unit need to be designed. The management of the new business unit can fully focus on the new market, while the other services can be provided by the shared service centre. For the shared service centre, serving one additional business unit generally will not take too much time and effort.
  • Preparation of outsourcing: at the start of a shared service centre, mutual exclusivity often applies. The business units are forced to buy from the shared service centre and cannot select a supplier on the external market, while the shared service is forced to sell within the parental organization only and cannot win external customers. A shared service centre can be a first step on the road to full outsourcing of an organizational unit, the so-called business process outsourcing (or: BPO). On the road to outsourcing the shared service centre can slowly detach from the organization, both in the legal and in the commercial sense.

 

Shared service centers have been on the rise in the past decade. An important explanation for this rise is the trend that organizations want to focus on core activities when possible. Every organizational unit has a specific core activity that has to be executed in an excellent way, and all other activities should cost as little time, effort and money as possible. Shared service centers align well with this trend.

Shared service centers have only been able to grow as fast as they did because of the rapid technological developments. A prerequisite for a shared service centre is the supple communication with its customers. Information and communication technology developments in recent years have enabled this. Important technologies that are used are traditional and internet telephony for individual and conference calls, video conferencing when visual contact is also important, and scanning and imaging for fast distribution and archiving of documents and forms. These technologies are all based on the world-wide data communication networks with high capacity that is available at reasonable costs today. In many cases, shared services have been able to realize their ambition of combined cost savings and improved quality of services. By moving the service centre to countries with lower wages, such as Eastern Europe or Asia, or to countries with attractive tax rates, such as Ireland, the costs per employee decrease.

However, shared service centers only work when the quality of its services meets the required service levels. The high level of education in these countries coupled with the language skills of their inhabitants has enabled many successful shared service centers abroad.

Shared service centers are certainly promising. However, the creation of a shared service centre is a substantial operation. Firstly, the selection of the right location is a complex project in which many factors play a role. Furthermore, the start of the shared service centre goes hand in hand with the termination of the existing organization, which means that currently employed staff may lose their jobs. This will have a financial impact, as redundancy payments will have to be made; redundancy payments often are a substantial part of the business case of a shared service centre. But more importantly, the prospect of losing their jobs will probably impact the motivation of the affected employees, while at the same time it is essential that those employees who will eventually leave the organization are dedicated to their work until the newly-founded shared service centre can take it over. Managing this process requires high-level leadership skills. Finally, the shared service centre may have to deal with skeptical or even distrusting internal customers, who were used to being served from colleagues who were based in the same building if not on the same floor. The shared service centre will have to prove from its inception that is can provide the services at the right quality from a distance [Janssen & Joha, 2006].

Even after the initial hurdle in the services has been taken, it is not easy for a shared service centre to provide the services at agreed prices and at the right quality level [Shulman, 1999]. Especially when the shared services are based in a different country, cultural barriers also have to be over won. Moreover, the shared service centre’s employees have to get used to specific rules and legislation for which they provide the services. In many cases, time zones have to be bridged and the number of overlapping voice hours is limited. Shared service centers are heavily dependent on data communication, which has to be available for purchase at high capacity and availability. Finally, the recruitment of employees for shared services is not easy, but the retention is an even larger issue, especially in popular locations where the skilled labour force is not inexhaustible.

In below image an example is presented of a shared service centre with various specializations based in several European locations.

 The shared service centre of Avis Europe

Avis Europe, the well-known rental car company, has accelerated the creation of its shared service centre.

The various locations each have their specialization: back office processes are carried out in Budapest while call centre activities are based in Barcelona. The company makes considerable investments. In 2005 and 2006 the total investment amounts to €36 million. The savings are substantial too: in 2007 the shared cervice centre is expected to lead to a €25 million saving.

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