Q: So when is “Shared Services” not really “Shared

Services”?

A: When it does not perform like shared services should...

By: Phil Searle

(Issue Details: Volume 7, Issue 8, October 2005).

The answer seems obvious, but the question is a critical one, especially when
considering what goes wrong when a shared services operation fails. Not every
implementation is a success. So, what characterizes a poor implementation, and
what are the signs that one should look out for in a failing shared services
operation? In particular:

o What are the danger signs of a failing shared services operation?

o What are the root causes of a failing shared services operation?
o How can this be turned around?

Before we start, and as a backdrop to the discussion, there are basically three
definitions/descriptions of shared services:

1. An organizational definition: shared services is the organization that

provides non-core services to the business, employing a specialist
team, geographically unconstrained, and focusing on the requirements
of the customer. This involves a philosophy and approach totally unlike
traditional corporate-driven centralization.
2. The goal of shared services: to provide high quality, non-core services
(which can include both repetitive common processes and more
specialized professional services) to the business at lower cost and
more efficiently than the business could otherwise provide for itself.
3. How shared services achieves its goals: shared services achieves cost
savings and higher quality of service by leveraging economies of scale,
organizational realignment, core technology, standardized processes,
best practice and end-to-end process re-engineering.

A failing shared services operation will, simply put, not provide the high quality
services it should to the business in a cost effective, customer-centric fashion; it
will not exhibit the best-in-class attributes of successful shared services
operations such as leveraging standardized processes and core technology; and it
will not run with an energetic, highly motivated team.

What Are the Danger Signs of a Failing Shared Services Operation?

Some of the possible warning signs include:

(1) The general absence of a service orientated way of operating

Generally speaking, an internally focused and defensive shared services

organization is a good sign that things are not right. Defensiveness often comes
from being unsure of one's own position and can emanate from repeated criticism
that cannot be addressed effectively. Further, an organization that is internally
focused is, by its very modus operandi, not operating as an external, customer-
focused shared services operation.
(2) High staff turnover and low morale

Some level of turnover, usually around 5% to 10% per annum, can actually be
advantageous to a healthy shared services operation, but much more than 10%
and anything over 20% is likely to be a clear sign of a dysfunctional shared
services operation. Having said this, high staff turnover can be linked to rapidly
rising wage levels associated with demand outstripping supply, especially in the
booming Business Process Outsourcing arena, so one does always need to
understand the underlying factors. Nevertheless, if you are experiencing high
staff turnover this is a warning sign that must be looked into.

Poor morale is also a clear warning sign that something is wrong. Employee
satisfaction surveys are a good way of uncovering this formally, but one can
usually sense low morale even without such surveys.

(3) No structured communication plan with customers

In a failing shared services operation, interaction and communication with

customers tends to be reactive. There also tends to be no clear communication
plan or clear “customer account management”. Examples of effective customer
communication exhibited by successful shared services operations include:

o Customer forums
o Customer satisfaction surveys
o Customer feedback loops, both formal and informal
o Workshops held between the shared services center and its customers to
improve processes, eliminate non-value add, and reduce chargebacks though
cost efficiencies

(4) Service Level Agreements not in place or not conformed to

Well researched and written Service Level Agreements (SLAs) are very important
to the success of a shared services operation. They do not, and should not, need
to be huge documents with complex algorithms, but should be practical, easy to
understand and “fit-for-purpose”. Internal SLAs, for example, do not necessarily
need to be as detailed as an SLA with a third-party outsourcer.

A lack of SLAs, a lack of updated SLAs, or a lack of relevance and use of SLAs
that have previously been put in place, are all warning signs of a shared services
operation that is in danger of failing, or has already started to fail, to meet its
goals.

(5) A lack of standardized process

This can be characterized by some or all of the following:

o Numerous exceptions and out-of-cycle processes

o Lack of clear and standard desktop procedures
o A lot of “noise” in day-to-day processing
o No clear process owners

(6) Negative customer relationships

This is often accompanied by a “blame culture” and a lack of trust between teams
and functions. Examples include:

o The predominance of shadow organizations

o Duplication of work effort
o Multiple depositories of the same data
o “Checking the checker”
o A feeling of “them” and “us”
o Frequent escalations of issues rather than resolution at the point of initial
ownership.

(7) Minimal use of automation tools

Examples of automation tools that could be used include:

o Standard Enterprise Resource Planning (ERP) tools

o Interactive Voice Response (IVR) and callrouting
o Document scanning, workflow and archiving
o Automated banking and reconciliation tools
o Automated procurement and goods receipt tools
o Self-service technology

A lack of use of such tools shows itself in predominantly manual processes,

paperwork all over the place, unintended delays in payments to suppliers, longer
timeframe to collect cash from customers, poor response to customer helpdesk
calls, higher costs per transaction processed, weaker control environment, etc.…
and while the lack of such automation tools does not on its own signify a failing
shared services operation, their absence makes it far harder to improve service
levels and reduce cost per transaction.

(8) Poor leadership and line management

It could be that there are individuals in shared services leadership positions who
do not understand what it really takes to operate and lead a shared services
team. Without leaders who really know what they want and how to get there and
have the ability, experience and drive to achieve success, it is very difficult to
attain shared services’ full potential. Look closely at your leaders and line
managers and ask yourself if you have the right people in the right roles.

(9) High cost of operation

Finally, failing shared services operations have a high cost of operation, as

measured by cost per transaction, cost of re-work, fully loaded cost per head, etc.
Furthermore, there are often significant indirect costs such as: the cost of shadow
operations; opportunity costs to the business resulting from missed opportunities
or lack of early warning systems (due to poor data integrity and lack of effective
reporting systems); cost of missed discounts; loss of external customers due to a
poor service experience (e.g. as perhaps experienced through a call with the
customer helpdesk); etc..

There are many benchmarks against which a shared services operation can
measure itself, including its own historical performance, its peers, and the wider
industry. Of course, an operation can also carry out more detailed benchmarking
of its own in consultation with a third party benchmarking specialist. This can be
useful when pulling together the business case and helps to understand the
situation today so that future performance can be measured against it.

What are the Root Causes of a Failing Shared Services Operation?

Now that we have understood the signs, let's look at why shared services
operations can and do fail. This really is the “million dollar” question. The simple
answer is that the shared services initiative has not been implemented properly in
line with best practice. The actual answer will be more complicated than this
because there can be quite a number of contributory factors, not least of which is
the understanding and motivation of the company/organization itself.

(1) A lack of senior level sponsorship and support

This is often and quite correctly cited as a critical success factor to any shared
services or BPO initiative, or indeed to any significant change initiative that cuts
across people, functions, organizations and locations. Without this, the shared
services practitioner will often find him/herself isolated and fighting internal
battles rather than acting as chief project sponsor on the ground. When disputes
do arise, the project lead will not be buffered by a more senior champion, so
progress can be slowed, frustration sets in and, ultimately, the project could fail.

Champions of shared services and BPO initiatives need to be active and vocal in
their support. Sometimes senior executives provide “lip service” sponsorship only.
While this is perhaps better than no sponsorship at all (debatable), it can also
reflect the executive who wants to hedge his or her bets so as not to upset the
business unit heads too much and/or fears being tarred with a failed change
initiative. The irony is, of course, that without active senior level support the
initiative is far more likely to fail.

(2) “Solutions” vs “quick fixes”

It is really quite amazing to reflect on how far shared services and BPO have
come in the last ten years. Many organizations now have some form of shared
services or BPO operating, and some have really taken this a very long way.
However, ten years ago people were questioning whether it was even possible to:
provide shared services for French, German, Italian, Japanese and many other
countries' F&A functions outside of their national borders; centralize what was
previously locally provided IT support and applications development into one or
two locations; outsource customer helpdesks to a third party; etc. Things have
come a long way and now it seems that CEOs and CFOs are, quite rightly,
questioning the effectiveness and cost efficiency of the full range of non-core
services. Just to be clear, “non-core” services covers the support functions of
Finance, HR, IT, Legal, Procurement, Real Estate and Site Services, and can also
be expanded to cover other support functions such as Marketing, Customer
Support, Distribution and Logistics. Unfortunately, this desire to keep pace with
emerging opportunities has meant that many organizations now “jump the gun”
and don't think things through before acting.

Every move to shared services or BPO needs to be carefully planned and change-
managed, while considering the unique requirements of each customer (internal
and external), function, region and jurisdiction. You can't just call it “shared
services” and hope it becomes so. I have seen organizations that think shared
services seems like a good idea (often more cost driven than service level driven)
and so have centralized and downsized before the framework and support
systems were in place to allow shared services to operate effectively. This is often
accompanied by individuals being “promoted” or “assigned” to lead the
implementation, or to take the role of Shared Services Manager, without them
having the appropriate experience, training and support.

The same rush to implement can, and sometimes does, occur with offshoring and
outsourcing. There are examples of companies which assumed that the financial
benefits of labor arbitrage could be gained by simply swapping out staff from
higher cost locations to lower cost locations, such as India, without considering
the following:

o Account management of the lower cost provider

o How to get the information and documentation to the offshore
location/outsourcer
o Security and IT issues
o Skill sets of the people to provide the service from the lower cost location
o Language and cultural requirements
o Foreign exchange and cross-border currency movement restrictions
o Political and economic concerns
o The need for tight Service Level Agreements as this is very important when
contracting with a third party
o How to ensure continual improvement
o How to remain flexible; the “get out” strategy needs to be thought through up
front because things change and business requirements and opportunities
move very quickly in the modern economy
o The fact that it is better in the short, medium and longer term to eliminate
work than re-locate it

This is absolutely not to say that lower-cost locations, either leveraged internally
or through relationships with third parties, should not be pursued as an option -
they should; it is just that badly thought through and poorly planned this could
cause extreme disruption, unrest and higher costs, and may well have to be
unwound at a later date, or be re-implemented.

Research has found that companies can save over U.S.$30,000 per person per
annum in labor costs by moving from an existing Western location to an offshore
location such as India or the Philippines. However, the “hidden costs” can be
significant. Companies can spend between U.S.$8,000 and U.S.$12,000 per seat
for additional facilities, telecommunications and technology infrastructure. Add
these to costs such as redundancy, lease termination, and internal project costs in
determining your overall return on investment. (Source: EquaTerra article in
December 2003 issue of Shared Services News).

(3) Company culture

Company culture is critical to the ease with which shared services can be
implemented in an organization. This links into senior level sponsorship and
support, but is also potentially more wide ranging in impact. So what exactly is
“company culture”? An organization's culture is what makes it different and
unique from other organizations that basically do the same thing. It is the way
things operate on a day-to-day basis (“the way we do things around here”) and is
determined by things such as:
o The top leadership
o Organizational hierarchy
o Openness to debate and discussion
o Extent of empowerment
o Management by individuals or by committee
o Formality (e.g. in dress code, titles, benefits, office layout, etc.)

Company culture can be conducive to change, fairly neutral or downright

obstructive. In many failing shared services operations people on the ground have
complained that “it is simply too hard” because there are too many barriers to
change. There may be good reasons for this that could potentially be addressed,
such as poor leadership or an inadequate communication plan with key
stakeholders; but unaddressed, an obstructive culture can result in a failing
shared services operation or, at the very least, an operation that does not achieve
all it could.

(4) Poor technology roll-out

While technology is not necessarily the most critical success factor, it is a

significant enabler. There are many examples of companies having rolled out a
“standard” ERP platform but with the scope of the implementation being so
limited (inflexible) as to encourage side systems to remain prevalent after
implementation; or, perhaps, limited to meeting just Head Office objectives,
without trying to capture, understand and take into account local requirements
(e.g. local statutory, regulatory and tax accounting, reporting and compliance
matters). It is also important to understand each function's needs so that the
user is confident that their needs will be met. This may require some changes to
the way things are done, but if the need is understood, rather than ignored, it can
be incorporated into the implementation plan. This does not mean that every
suggestion should be met regardless, but it is important to understand the
rationale behind each request. Management reporting of performance is a good
example of this. Most ERP platforms do offer management reporting tools to the
end user but if access to these is restricted, set up is not effective or training is
inadequate, then users “in the field” will have to find alternatives and this means
a proliferation of disconnected data repositories and reporting tools, including, of
course, the old favorite: the spreadsheet. This necessarily results in a higher cost
to produce data, lower data integrity due to multiple sources, reduced trust and a
weaker integration of systems and overall control environment.

One danger that needs to be watched for is the third party implementation
partner who is working on a limited budget and gets into “tick the box” mode,
rather than really understanding the bigger picture. While a clear scope is critical,
there needs to be flexibility in how to deliver, and, as situations arise, some
flexibility in how to move actual scope as well. More significant scope-related
issues can be flagged to the project Steering Committee.

(5) Lack of clear project plan and business case

Any successful value-add change initiative should be resourced, managed and

measured effectively against a clear business case. The business case also has
the advantage of clearly establishing the current state of affairs in terms of
service levels, cost, risks and challenges. This helps to reduce the impact of
“perception vs reality” down the track as progress is measured against how things
really were, rather than against how some people might like to think things were.
(6) Lack of employee training and development

I have heard it stated that “training is not a discretionary expense”, and I could
not agree more. Career progression, development, mentoring, job rotation, etc,
are all recognized best practices in high performance organizations, and, of
course, the same is true for shared services operations. Training and development
not only improves staff morale and retention, it also increases productivity,
engenders a culture of innovation and advancement, and promotes the sharing of
ideas to improve the performance not only of the individual but of the whole
team.

What Can be Done to Turn Around a Previously Failing Shared Services

Operation?

So what are some of the keys to successfully turning round a failing shared
services operation?

(1) Senior level executive sponsorship

Make sure that key executives understand and support the roll-out. If such
sponsorship is not present then investigate why and determine whether there
really is the appetite for shared services. Engage with senior executives and sell
the value of shared services to them, either again, or for the first time.

(2) Proper baselining and a key business case

Budgets need to be set and managed. It is easy to spend multi-millions on a poor

initiative (especially on technology) if things get out of control, but it is also
entirely possible to spend much less and get a much better result. Remember to
highlight and track as best you can qualitative as well as quantitative benefits,
along with costs. If this was not done in the first place, do it now and start afresh.
Use the opportunity to reengage employees and customers by treating this as an
exciting and new value-add initiative.

(3) Do not underestimate the change management required for any such
initiative, including a turnaround

Shared services initiatives cause, and require, significant change affecting people,
processes and organizations. As this is a turnaround situation one does need to
be very careful of openly criticizing people attached to the original
implementation, especially as many of the issues faced may well have been
outside of their control. Problems need to be addressed, but in a “non-blame”
way.

(4) Carry out regular communication with all relevant stakeholders

Engage users or they will feel pressured and will react against the change.

(5) Assign your best resources and people to the project

Remember: This is a significant investment and its success will be “mission

critical” to the success of your organization, so make sure you give it the best
chance. Look closely at existing leaders, project managers, business process
owners, third party consultants, etc, and make changes where necessary.
(6) Training is key

Not just to show users how to work in the new environment and how to use the
new tools but to make them feel more comfortable with the new processes, rules
and technology. If there wasn't an effective training program in place previously
then establish one now.

(7) An ERP system is an “enterprise” system for use by the business

It is not a technology solution owned, or to be used exclusively, by the IT

department. Make sure this is understood by key stakeholders and internal
customers, as well as by the implementation team itself.

(8) Make sure that service delivery requirements are clearly understood

Then map these to the shared services organization and your chosen ERP
system's configurable processes. Do not simply replicate current state processes
– be requirementsfocused and stick to best practice.

(9) Follow the “80/20” rule for shared services ERP when deciding
whether to use “vanilla” ERP functionality

If your core ERP can provide you with 80% of the functionality that you require as
standard then you should go with this every time. The remaining 20% will either
have to be foregone or internal processes adapted to meet the standard
functionality offered. As mentioned above, ensure that business requirements are
clearly understood.

(10) Have regular, meaningful Steering Committee meetings of key

stakeholders

This should be an active committee and not just a chore to get through unscathed
every week. If such a Steering Committee was not in place before, put one in
now and make sure that it functions as it should.

(11) Try to cleanse the data as much as possible before each main cut-
over or clean-up

The quality and volume of data should be worked on early in the project and not
left to the last minute. Again, if this was not done first time around then it will
need attention in the turnaround or re-implementation.

(12) Engage targeted expert outside help

Neither abdicate responsibility for the project to a third-party consulting firm nor
try to do the whole thing “on the cheap”. A partnership approach with relevant
and expert outside help is the best way to proceed. This may well mean dropping
the previous third party used, or working with them this time under a different
set of ground rules. But it also may entail actually engaging third-party expert
help for the first time.

(13) Make sure your team includes regional and local expertise and be
prepared to travel to meet and work with users
Do not think that you can run the whole project from Head Office. Visiting your
customers saves them time and proves your commitment to them.

(14) Consider using chargebacks to actively support shared services

For example, penalize users who do not follow standard processes or stick to
using non-core ERP systems. If chargebacks were not used first time around then
perhaps they could be of help going forward, as long as requirements are clearly
understood, agreed and documented in SLAs.

(15) Remember always that the project does not end with “go live”

There needs to be adequate support post golive and also continual training and
retraining. This is a key to success and to the turnaround of a previously failing
shared services operation.

(16) Keep working towards your goals and be relentless in pursuit of

them

Shared services initiatives require significant commitment both in terms of

resources and in terms of energy. Turnarounds can be very difficult, but can also
quickly demonstrate improvement that should be readily recognized by all parties,
which helps build up trust and a momentum for continued and significant success.

Summary

Implementing shared services is a major change initiative that can derive

significant business benefits in terms of reduced costs, better services, improved
quality, speed and accuracy of data, and a tighter and more efficient enterprise-
wide control environment. However, success is not a given and there are many
examples of shared services operations that have either simply failed or have not
achieved anything near their full potential. This article will hopefully help shared
services champions and practitioners look for the danger signs, identify the root
causes and, from there, work out the best ways and methods to turn the situation
around.

About the Author

Phil Searle
Group Vice President and CFO
Cendant Travel Distribution Services, International Markets Division

Phil Searle is responsible for all areas of Finance for Cendant TDS's International
Operations across four continents, covering Accounting and Control, Decision
Support, Financial Planning and Analysis and Financial Shared Services
(Professional, Technical and Transactional). Prior to being at Cendant Phil was VP
Finance and Corporate Controller at 3Com Corporation, based in California. In
this role he headed the Corporate Controller Function and the Worldwide Shared
Accounting Services team. While at 3Com he led far reaching organizational,
technology, service delivery and business process improvement initiatives.

Copyright © 2008 SSON. All Rights Reserved.

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