As a precursor to outsourcing, shared services could potentially ready an organization for moving services to an external provider.
Many customers seem to decide on a mode of HR transformation mostly on the basis of political or cultural viability. Then they call in management consultants who specialize in either mode of delivery but not both. Then, they call someone to implement the technology tools needed. This is a bad strategy.
Take the results of a recently published Mercer study, “HR Transformation v2.0: It’s all about the business.” In an interesting comparative approach with an earlier study, Mercer demonstrates that the HR function is changing rapidly. Redesign of HR work processes is completed for 30 percent of the respondents, and 60 percent plan to complete this in the next 12 months. Designing a new strategy for delivering HR services is complete in 38 percent of organizations, while 51 percent plan to have this completed within the next 12 months. Evaluation and implementation of a new HRIS technology is complete for 24 percent of the organizations, with 50 percent planning to have this done during the next year.
It is telling that HR business leaders are focusing on alternative service delivery models—that is the way to ensure transformation does not stay on paper.
The shared-services approach is clearly one of the best practices deployed by leading companies. It also paves the way for BPO, in that service centralization, process optimization, and harmonization start here. It is not surprising, then, that BPO may sometimes be the desired end state, but so far shared services have almost always preceded BPO, and a hybrid model is common.
A key element for successful shared services is the business awareness of the outsourced function, which takes it beyond mere centralized services. Successful shared-services centers are run as a standalone business. Process standardization around best practices, smart deployment of technology, and spreading of relating investments over a consolidated cost base allows these successful operations to reach their goals.
Take a look at the cost benefits for shared services and BPO. BPO advantages include financial and quality gains, a healthy focus on core processes, a disciplined transformation, and a fast track to gains. Offsets include extra costs for governance of operations and provider, a potential cost increase for the retained processes and staff, and paying the provider’s profit.
Shared-services advantages include no governance costs, complex contract negotiation, or risk of provider viability. Consider some of the characteristics of BPO.
• Scale. There is less potential BPO gain for an organization that has already achieved a high amount of scale in its processes. And there is dilution of scale
efficiency for organizations whose HR staff is not specialized because many retained HR professionals will be “half-loaded.”
• Standardization. This is a crucial element in realizing the advantages of BPO. Service providers are more able to apply standardized and reusable approaches to people, processes, and technology, and organizations must be able to accept these approaches to benefit from the related gains. When process/technology standardization is not allowed by a client organization, then there is relatively little potential for BPO gain.
• Process optimization. When the customer drives process design and underlying technology choices and takes care of change management, the opportunity to realize BPO benefits is more limited than when the provider gets involved.
• Labor arbitrage. Whether it yields significant returns for BPO depends on the amount of work that an organization already offshores. If there are limited offshore operations or none, the offshore capabilities of the provider will bring sizable gains.
When we look at the evidence—whether from Mercer, Hackett, Watson Wyatt, or our own SAP research—we can conclude that service centralization in HR and F&A is here to stay: the economic fundamentals are compelling, and the business knowledge and management practices are mounting. However, strategy and execution of process and technology redesign are still not widespread, but these are important since proper technology adoption is a prerequisite to unlocking the economic fundamentals responsible for the gains.
And, as said in the beginning, linking business owners with the delivery side yields returns: It takes strong management skills to pull off a sustainable successful service centralization strategy, and both knowledge of operations and knowledge of outsourcing need be part of the mix.