Enabling Technology

Consider Shared Services: An Alternative to Outsourcing

Sure, shared services reduces overall organizational spend, but do you know if internal pricing is as competitive as what outsourced providers can offer?

by Matt DeLuca

From time to time, “shared services” creeps into the jargon when outsourcing is the topic. I remember giving a presentation a few years ago in Houston to a group of HR professionals who wanted me to address both topics in my presentation. I agreed to do so but thought it odd that both subjects were given
equal billing.

Outsourcing, as we all know, is the process of using services outside the organization to provide assistance internally. It differs from supplier/vendor relationships in the matter of the intensity of the relationship. If the link is transactional, then you are dealing with a supplier. If you see your external source as a strategic and integral part of the effective and efficient delivery of a specific service, then outsourcing is the more accurate word to use when describing the role that you, the buyer, expect.

In recruiting, for instance, if you bounce from recruiting firm to recruiting firm when filling an opening, or you open relationships lightly when you happen to have the need, then you are using the recruiting firm as a vendor/supplier. If you only deal with the same, few firms that you’ve used for a while, if you welcome them to your organization in an attempt to help them be more effective in their performance, and if you are not afraid that they will pass out business cards and steal from your current staff, then you are dealing with an outsourcing relationship. Remember, if the relationship is so strategic that you cannot afford the uncertainty of the firm changing its mission (e.g., being sold), you may be prepared to purchase it so that ultimately the service is “insourced.” So where does shared services fit in?

The term “shared services” has been around for quite some time and is used to connote a situation where the end user agrees to pay for the service. The “shared” aspect comes from the fact that several business units within the organization are recipients of the service and are charged a share for its use.
I remember a shared service concept during my time at Chemical Bank (now JP Morgan Chase), and it had a separate finance function to allocate costs. It makes sense to consider this from a variety of perspectives.

First, what is the objective of shared services? It’s usually expected that economies of scale can help individual units achieve a cost-effective price for combined participation. The service may be a functional (for example, accounting and marketing) or geographic (the European territory) arrangement.

How does it play out? Simply put, there is a central processing unit to take responsibility for the delivery of services for each of the units throughout the organization. The function may be payroll, reference checking, benefits administration, or recruiting. Each unit gets assistance from a “central” unit that offers services under its umbrella.

For instance, the accounting units of three separate areas are expected to utilize the services of the recruiting group assigned to them; for that access, those units are charged a fee. The unit in turn has a matrixed relationship—it reports to the central HR unit, but costs are charged to each business unit.

Note: the relationship stays “in-house.” The thinking is that a group serving several business units will be more responsive and cost-effective. In recruiting, for instance, the HR shared services unit will gather and pool resumes available for openings at any of the units for which it is responsible. Also, unit managers will realize there is a price for these services and, therefore, value them.

That’s fine, but individual units may sooner or later begin to wonder if the price is effective; that is, whether the price charged by shared services is the right one.

And that brings us to the next issue. If I, as a manager responsible for paying for the shared services, am not happy with the level of service, why pay for it at all?

Why not consider such alternatives as doing it myself, or even outsourcing the service? It’s a question companies often ask, and I’ll address this in my column
in the next issue.

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