ContributorsMulti-process HRSourcing

A Business Case for Shared Services

Everyone strives to be a world-class organization, but only a minority achieve this goal. The secret, according to The Hackett Group, is in how organizations roll out shared services and whether their efforts are truly transformational or simply a gathering of warm bodies. Read on to find out the hallmarks of a highly effective shared-services business unit.

by Andy Teng

If world-class is what you aspire for your HR organization, then discard any conventional wisdom about shared services—increasingly the precursor to full-blown HR outsourcing. That’s because companies too often lump centralized services in with shared services—a mistake that leads to missed opportunities to generate greater savings and happier employees at the same time.

Don’t take our word for it—just ask the tack-sharp brain trust at the Hackett Group, which recently found that properly implemented shared services can reduce HR process costs by up to 80 percent while also boosting satisfaction, productivity, and quality of service. The Atlanta-based corporate benchmarking firm also concluded in its running survey of world-class organization that their HR spend is 13 percent lower and their HR-to-staff ratio is 15 percent smaller than others.

“When it comes to reducing process costs, shared-services organizations (SSOs) are clearly a time-proven technique,” said Hackett HR practice leader Stephen Joyce. “The best HR SSOs view themselves as more than just back-office support. They operate as businesses in their own right, positioning themselves as preferred suppliers to their internal customers. Through this approach, world-class HR SSOs generate exceptional benefits.”

TELLING FIGURES

In its findings—a rolling, three-year set of benchmarks contained in the “Hackett 2006 Enterprise Book of Numbers”—Hackett followed the results of 125 companies. Using efficiency and effectiveness metrics, world-class employers are those in the top quarter of the group, and their results are matched against the rest. What Hackett found should serve as a wake-up call to organizations that have failed to act on shared services, a reckless oversight considering that their competitors are leveraging not just shared services but also low-cost, offshore services.

Consider the following results:

• More than 60 percent of all companies with HR SSOs have achieved cost reductions of 21 to 80 percent;

• Internal client satisfaction has also improved along those lines;

• World-class companies spend $1,614 per employee on HR, compared with $1,864 for the typical company;

• World-class organizations employ 11.5 FTEs per 1,000 employees, compared with 13.5 FTEs for the average.

How do world-class companies do it? According to Joyce, the key is to view SSOs as a standalone business and not just centralized services. The difference: SSOs go way beyond bringing bodies under one roof, Joyce pointed out. Instead, they are very comprehensive and systematic in their approach to delivering services at the lowest costs. Moreover, because they must answer to stakeholders, these entities have no choice but to continually improve.

“Typically companies stop at centralization. The greatest leverage comes when you are moved into a shared-service model. When we talk about shared services, it is different from pure centralization. Essentially what we find is just bringing people together under the same roof gets you marginal savings,” Joyce pointed out. The greatest returns come “when you start simplifying and standardizing across all your units and apply technology. It’s really looking at processes from an end-to-end standpoint. It’s economies of scale.”

Although many companies strive to become world-class performers, a number of factors slow their progress, including confusion over what really constitutes shared services, institutional inertia and, at times, misuse of data that supports the wrong goals, Joyce said. In addition, even when HR leaders are able to address these problems, they might not have the resources or executive buy-in to support their transformational goals.

HR EXEC LIMITATIONS

One of the impediments to HR leaders reaching their goals may also be their own inability to identify internal weaknesses and to make tough people decisions, Joyce added. Implementing an effective shared-service strategy sometimes requires heads to roll, and HR leaders are often too concerned with “looking out for people’s jobs and minimizing the impact,” he said.

“HR execs have to look at the brutal facts, the brutal realities, and they have to assess the situation,” Joyce added. “If they don’t have the talent in-house to do this, are they willing to go out and get this?”

Specifically, the survey noted, organizations must invest in measuring their effectiveness and implementing hard performance targets to ensure successful HR transformation through shared services. World-class organizations have shown that through service level agreements (SLAs) and stepped-up training for staff, they are able to generate greater cost savings and efficiencies than their peers. For instance, top performers provide staff with 40 hours of training a year, twice that of the average company.

Furthermore, world-class companies have a much more simplified infrastructure, with a single ERP/HRMS and a flatter hierarchy that boasts fewer managers and less than half the number of job grades as typical organizations.

Although those ranked in the top quartile boasts lower costs, one startling fact revealed in the latest survey is that their HR spend has been growing faster than average. But Joyce pointed out that this is the result of a more strategic spend that may ultimately prove to be a better return for the overall organization. By investing in things such as strategic workforce planning, they are ensuring they have the necessary talent for growth initiatives in the near future.

“They are assessing needs for the next 3 to 5 years and performing a gap analysis. They are more business focused,” he added.

But that may be the very area in which HR leaders have traditionally lacked strength. Not understanding and supporting business needs have long been a complaint against HR, which for various reasons has not made the business case one of its priorities. But for those who want a seat at the table, supporting business goals is a must, and workforce planning is one key support mechanism. Joyce also pointed out that by cutting costs in transactional activities, these leading organizations are able to spend more on strategic initiatives.

Joyce noted that the benchmark information presented in the survey is one way for organizations to gauge the effectiveness of their shared services program. Through external data, they will be able to build an internal business case for undertaking shared-services improvements.

THE EFFECT ON OUTSOURCING
How effectively organizations implement their shared services strategy will ultimately affect their outsourcing strategy. With many companies now realizing that the transform-then-transfer model is more successful than a lift-and-shift one (see this month’s Etcetera column, p. 12), creating a world-class shared-services platform first improves the success rate of HRO later on. Joyce said many employers who have built out their internal capabilities take the HRO route because it is still more cost effective and can react quickly to changing business needs. It demonstrates that high-performing businesses understand the importance of not becoming stagnant.

“Typical companies look for silver bullets,” he said, “but world-class ones are always on the lookout for improvement opportunities,” Joyce added.

Tags: Contributors, Multi-process HR, Sourcing

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