Centralising versus sharing, and why the difference matters

The term ‘shared service’ is very popular as companies see it as a means to reduce cost through economies of scale. The same principle is at work when opting for centralisation, but there are distinct differences. This post describes how shared service centre differ from centralisation and why it matters to make this distinction.

What do sharing and centralising have in common?
Common ground 1: I found among others the following definitions they are an indication that both terms are closely related:

• Centralisation: is the process by which the activities of an organization, particularly those regarding decision-making, become concentrated within a particular location and/or group.
• Shared Service Centre: A shared service centre (SSC) is a centralised business unit that undertakes internal business functions for divisions or subsidiaries of a particular company, rather than having those functions conducted separately

Common ground 2: shared objective is striving for improved productivity of generic (often non-strategic/core) services or products which are used by multiple business units (e.g. accounting, HR, IT).
Common ground 3: execution of objective by standardisation of working processes and underlying IT systems.
Common ground 4: in both cases does the company want to retain the assets on its balance sheet and control over the resources and IP used (contrary to outsourcing).

What are the differences between centralising and sharing?
Different ground 1: Standardisation and sharing requires the stakeholders to agree on a common process and interface description. The decision maker has however typically a different function. When centralising the design is often a directive from a senior corporate/group level manager (accountability is also at group/corporate level) and the decentralised business units have a limited influence on the design.
In a shared service centre is it more a joint effort by business unit managers (and CxO as a sponsor) and drives a manager appointed by the heads of the business units the design and implementation of the centre.
Different ground 2: centralised activities are more difficult to spin off or outsource than a shared service centre as the latter one has clearer governance, legal structure (separate entity) and financial configuration (own balance sheet, P&L). So activities that are considered to be value add and potentially interesting to spin off, sell or outsource are typically put into a shared service centre.
Different ground 3: centralised activities are typically performed at the same location as head quarters or other staff/corporate functions, while for shared service centres often near- or offshore locations are considered to further reduce cost through labour arbitrage.
Different ground 4: the business units receiving services and products from a centralised department typically don’t have to pay for it (apart from a yearly charge for ‘corporate overhead’ using standard keys) and the department is typically managed as a cost centre. Shared service centres can start as a cost centre, but typically evolve into a revenue centre and even an investment centre. Business units typically pay for actual use and may have the option to buy the service/product from an external vendor if the shared service centre does not charge market conform prices.
Different ground 5: to achieve further optimisation of quality and price can a shared service centre opt to outsource part of its activities while is this not very common when centralising.
Different ground 6: a shared service centre has always more than one business unit/process as a ‘client’ while this is not always the case with centralised activities.

The Do’s and Don’ts of sharing and centralising
Tip 1: Centralising or sharing a function does not mean that all related activities should be concentrated. Those activities that are very close to the essence of the business process/unit are best kept decentralised (e.g. financial reporting for decision making). Discuss the scope of the activities that can be shared/centralised with the relevant stakeholders.
Tip 2: Start with transactional activities (e.g. accounts payable). These are typically the least business process/unit specific and allow for relative low risk, limited scope initiative which, if successful, paves the way for increasing the scope to include more complex services/ products.
Tip 3: Don’t try to build a moon rocket the first time around. So do not try to transfer multiple country, design and implement a new process model and build a new high-tech IT system all in one go. Use a phased approach, one step at a time.
Tip 4: Do not set up a shared service centre in an offshore location (‘captive’) all by yourself if you don’t have extensive international experience as a company. Consider in that case to have a local service provider to setup the captive under a Build Operate Transfer model (BOT).
Tip 5: Involve those managers that are directly affected by the reorganisation from the earliest moment possible. This means the CxO defines the high level roadmap/direction and involves from that moment on all his direct reports to define the scope and (high level) design principles.
Tip 6: consider whether ‘broken’ processes should be fixed first before being moved or the other way around (move, then fix). Both have their (dis)advantages that have to be taken into account.

The question why it matters to make the distinction is already captured in the text above. There are several fundamental differences between centralisation and sharing (e.g. accountability, financial structure, location).
When to centralise and when to share? I think that depends mostly on a) the management culture (centralising is more conservative) and b) whether there are any future plans for a spin off/Joint Venture/outsourcing.