Professional Outsourcing Report Managing Shared Services

1 Professional Outsourcing ReportIndependent editorial sponsored by: Managing Shared ServicesBusiness is about people, and organisationsare collectives of people. People behavebest when frameworks and protocols areput in place so that they can reachagreement with other people and getthings done. So for a Shared service centre(SSC) to be both efficient and effectivemeans creating a governance structure toensure that: 1) everyone agrees what shouldhappen; 2) those decisions are carried outas planned; and 3) the service stays fit forpurpose as business needs change andfurther improvements are demanded.

2 This is no simple matter, because success is ultimately determined by the end customer. The result is a tough set ofchallenges in terms of Managing an SSC and guiding it to matter how thorough the re-engineering of work processes might bewithin an SSC, most business support servicesare integral to the business in some way, and that makes it difficult to routinise and measure them. At the same time, somecustomers may have individual needs and so a balance will need to be struck betweenstandardisation and customisation.

3 Service volumes and customer needs may change at any time and the SSC will beexpected to cope with fluctuating activitylevels. More, the way in which tasks areperformed will have to adapt to the changingneeds of divisional and end customers overtime and, on top of that, the SSC also has to reduce and control costs. For most SSCs, the starting point for agovernance framework is finding the idealpoint between the service s contractualaspects (its legal foundation) and its relational(human) elements. Contractual modelsThe contractual approach is rooted in anassumption that business decisions aboutwhether to buy a product or service areessentially rational.

4 In other words, they are based on: quantifiable attributes; apredictable environment; homogeneousproducts; and a presumed open market. Transaction Cost Economics (TCE) holds For most SSCs, the starting pointfor a governanceframework isfinding the idealpoint between the service scontractual (legal)aspects and itsrelational (human)elements. 10 Professional Outsourcing ReportWhether they are in the public or private sectors, Shared Services demand good governance. Ian Herbertand Ye L uexplain how the right governance framework can blend aspects fromcontractual and relational outlooks to deliver lean, responsive ofgovernancethat free market conditions are likely toproduce the optimum cost.

5 However, ascustomer needs become more variable,complex and/or dynamic, the counter-argument is that if the cost of negotiating,monitoring and supervising the externalcontract is greater than that of managingactivities in house, then the product shouldbe made rather than bought modelsThe relational approach recognises that rigidcontracts may not be appropriate when theproduct/service and its production/deliveryare variable, and/or when the businesscontext is fluid. In other words, a moreflexible and co-operative approach may be required, in which the two parties workthrough issues as they arise.

6 Different combinations of these distinctapproaches will lead to one of four broadoutcomes: One-off bargains are struck on an ad hocbasis, with each seeking to optimise price andretain flexibility of supply. In this scenario,functionality is no better than the marketProfessional Outsourcing Report 11 GOVERNANCEW orkers at a UK Toyota was one of the firstJapanese companies to develop the concept of Inter-Organisational Cost Management(IOCM), pursuing target costingand continuous improvements in supplier relationships.

7 (Photo: Press Association) standard. Quality and reliability (delivery) may be variable and there is little ongoingloyalty to any supplier. Contracts are placed with a fewpreferred suppliers on a medium-term basis,specifying basic quality and functionalitythresholds. An emphasis is placed on functionality,quality and reliability through the personalinvolvement of leaders from both sides. Inthis version, compromises may need to bemade on pricing and delivery. A mutually beneficial relationship isstruck to improve all aspects of delivery,given the two different sets of emphases.

8 (In the public sector, this is where possibleconflicts can arise between shareholder andtaxpayer value see ProfessionalOutsourcing, passim.)Subjective elementsWhile a key theme of the SSC model is to commoditise back office activities, theinputs and outputs of many business-supporttasks are likely to remain subjective perhapseven intangible. This creates a number ofchallenges. Among these are: Many Services (while low-level) areintegral to the ways in which core parts ofthe organisation work. Indeed, they may even define the customer experience,especially if the prime product is acommodity, such as electricity or gas.

9 Services are typically provided by Professional functions such as finance, HR,procurement and IT, which have often beeninsulated from direct commercial pressures. External supply chains tend to be dyadic(one to one) in nature, whereas for themiddle manager in an SSC environment thesituation is more akin to being the hub of a 360-degree network. Both inputs and outputs will probablyinvolve explicit and tacit how to meet these challenges? Oneway of framing the problems of the SSCenvironment is as a supply-chain manage-ment issue.

10 Inter-Organisational CostManagement (IOCM) is a discipline inspiredby Japanese carmakers such as Toyota, whichpursued target costing and continuousimprovement in their long-term partnershipswith suppliers. IOCM seeks to understand the roles of trust, communication andinformation-sharing (learning) betweenorganisations so as to achieve mutual benefit. While techniques such as Just in Time (JIT) and target costing might now becommonplace in some industries, they stillrequire a significant degree of interpersonalinvolvement and cooperation betweenparticipating firms, so that quality can beimproved, costs reduced and inventorylowered.