Shared Services: Training Wheels for First-time Outsourcing Adopters?

Should companies engage in shared services before they outsource? While some report better results with this intermediate step, others say it’s not really necessary to ensuring great HRO implementation.

by Andy Teng

When it comes to analogies, you can say HRO is a bit like a bicycle. If you’ve never implemented a deal, it’s harder to master than it looks. You start out wobbly, get disappointed with the initial results, and probably feel a little uncomfortable in the seat. But after a while, you wheel along just fine and certainly more efficiently than on two legs, or pre-outsourcing.

If HRO is a bicycle, you might think of shared services as training wheels. They are sometimes temporary until the rider masters his balance; they offer a degree of assurance; and they train the user to develop the skills needed to ride unaided—just like a shared-services center does. For both the HR organization and the rider, training wheels can yield results more quickly.

It’s a lesson many European companies have learned and are putting to practice. In fact, they may have learned this lesson far better than U.S. counterparts, whose appetite for enterprise, end-to-end HRO has diminished after early pioneering HRO buyers struggled with their engagements. Europeans, on the other hand, have leveraged the shared-services experience to their advantages, sometimes insourcing services to a captive facility before they take on outsourcing. According to a number of industry observers, this approach has clearly prepared them for the outsourcing journey. So as the market matures, will shared services become a necessary step to successful full-blown outsourcing?

To some observers in the industry, it’s not a necessity but probably a good idea to embark on a shared-services or HR transformation undertaking first. While moving straight to an HRO arrangement may seem like a more expedient way of achieving the same goal, some companies that have done so report problems with implementation. Although buyers who have engaged in shared services are not immune to such stumblings, they typically report fewer issues and can work through them with the service provider more quickly. Furthermore, because their shared-services journey often involves cleaning up policies and processes, these companies face fewer hand-wringing decisions when they do outsource. That has been the experience of many European businesses.

“If you compare it with the U.S., the degree of complexity in Europe is considerably greater, involving multiple jurisdictions, compliance environments, and different regulations. This makes the tasks of HR, by definition, as complex as the number of countries involved,” said Andrew Kris of SharedXpertise, a Brussels member-based professional organization that helps members with transformational efforts, whether they are outsourcing or insourcing. “The more processes you have standardized and the better systems you have—meaning the more you clean it up—inevitably it means you get better value from outsourcing.”

Indeed, the task of consolidating processes and people to a shared-services center is akin to shifting HR services to a third-party provider. The difference is that because it’s a captive, clients themselves and not providers are responsible for the transformation effort. This presents opportunities to overhaul back-office processes and policy, but it also requires greater internal investments in technology, process knowledge, management, and time.

According to Kris, some 65 percent of the FT 500 organizations operate some form of shared services, either as a stand-alone operation or consolidated into an existing operation.

Organizations that have captives face a double-edged sword. On one hand, because these centers typically deliver more than just HR services, the potential for savings is greater. A survey of global organizations conducted earlier this year by Accenture showed that cost savings remain the biggest driver behind companies establishing shared services. Bringing call-center support, HR administration, finance and accounting processing, and other functions together under one roof can lead to tremendous efficiencies over time. Furthermore, because services are centralized, management also has a clearer line of sight of their back-office costs and can more easily implement enterprise-wide changes, as well as IT infrastructure upgrades.

However, the downside is that these operations can be problematic because more stakeholders are affected by how they are run. Typically, more decision-makers must weigh in on system and process changes, and the organizations must retain shared-services expertise—through an outside consultant or an experienced internal leader. There is considerable upfront cost as well, including the capital investment in people, buildings, and infrastructure. When all is said and done, cost savings may be minimal.

And there are the risks. According to Accenture’s survey, all respondents rated change resistance to multi-function shared services as either very or somewhat difficult to overcome. And they characterized the unwillingness of functional leaders to relinquish control in the same way. In fact, many of the challenges of establishing shared services are the same ones facing organizations that outsource.

So if the pain points are the same, why would companies consider undergoing the same experience—first establishing shared services and then outsourcing—twice?

In the case of global chemical giant DuPont, the shared services journey yielded benefits for the company when it later outsourced. In one of the landmark deals in the HRO industry, the Wilmington, DE-based multinational awarded a $1.1 billion end-to-end contract to Cincinnati-based Convergys that covered myriad services, including payroll, workforce planning, benefits administration, and others. The company decided to outsource even though it had just a few years before built a state-of-the-art shared-services center in Astoria, Spain, which Convergys acquired as part of the deal.

Ernie Lareau, director of portfolio and program management at DuPont and one of the chief architects behind the HRO engagement, recalled that DuPont made special investments in the facility, hiring a higher caliber of employees who could handle calls beyond using a script. He said the company wanted to make sure the facility could better address issues that employees had.

But despite having invested heavily in the Spanish facility, the company in 2005 entered into the contract with Convergys, declaring that HRO could further help transform HR and bring business benefits to the company.

Lareau described the company’s HRO aspirations in 2005 as unique in the industry. At a time when many organizations were either engaged in a lift-and-shift deal or considering a transform-and-transfer arrangement, he said, DuPont’s approach was to define the future state of HR and undergo the transformation through HRO but spend its energies on change management. To do that, he said, required the company to understand what its needs were and what its “base case” involved.

“Certainly, we understood what we needed for our requirements better as a result of having [the shared-services] experience. What we did with that information was to build out our base case and build out a global infrastructure using that European model,” he said. “We could use that foundational experience and build out a global footprint.”

Lareau said the most valuable aspect of having undergone the shared-services experience was understanding the cost basis for service delivery and expectation. Through it, DuPont had a baseline from which it could negotiate with potential HRO suitors. At the same time, the company also standardized service levels that providers needed to comply with, he added.

Did undertaking the intermediate step help the company better implement its HRO engagement? Lareau declined to comment on the implementation, but he pointed out that a buyer that has shared-services experience is ultimately a better outsourcing customer and can more clearly state expectations and set service level agreements for the provider.

In addition, he noted that DuPont was able to recover some costs associated with the Astoria facility after selling assets to Convergys. He said the fact that the provider wanted to make the acquisition played a part—albeit a minor one—in DuPont’s choice of vendors. Lareau also cautioned buyers looking to sell their shared-services facilities to the provider to make sure the asset is a good fit.

“Is it going to be additive to the provider or is it going to be a distraction?” he posed, adding that in his view Astoria was a good fit for Convergys because the provider needed a Western European facility from which to serve clients.

While DuPont was able to recover some of its shared-services investment, that might not be the case today for many new buyers, said Monica Barron, vice president of research at the Everest Group, a global sourcing advisor. She pointed out that a few years ago, HRO providers might have been more willing to acquire the shared-services assets of clients; today, with many of the large enterprise-level providers having built out their infrastructure, it’s no longer financially feasible to acquire additional capacity. “In today’s world, the provider isn’t willing to take it on,” she added.

Barron, who said that Everest advises half of its clients not to outsource, questioned the idea of investing in shared services before moving to an outsourcing model. While the benefits of such a move are clear—standardization and harmonization of processes that will ensure a smoother transition to HRO—she insisted that HR organizations can achieve this independent of a shared-services center.

“Why go through a shared-services step and change management twice? I think it makes sense from an investment point of view and expertise point of view to work directly with suppliers,” she said.

However, she acknowledged that sometimes organizations are just not ready for a full-blown outsourcing engagement and prefer to have a precursor step. It all comes down to whether HR leaders are comfortable with taking the leap. “It’s more of a cultural question,” she added.

So are companies better off engaging in shared services before they outsource?

The answer is unclear. While some report experiencing a smooth transition by taking an intermediate route, others have not. Similarly, there have been high-profile failures as well as successes among companies that have moved directly to outsourcing. One thing is clear: Transforming HR prior to outsourcing usually results in fewer implementation problems and clearer communications between buyer and provider. But as with a first-time cyclist, expect some crashes to occur.

Posted November 10, 2007 in Engaged Workforce

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