Which Shared Service Centers are sustainable?

Centralisation, either in a shared service center or another form, promises lower cost, a more consistent quality level and faster decision making by consolidation of responsibilities. Putting theory to practice is however not always that simple.

Cultural difference, disagreement over the new process standard and lack of governance by the internal ‘clients’ towards the SSC are well known issues which may limit the realization of benefits. As these issues have been discussed already in-depth by various writers will I not cover them again.

An issue which is less frequently mentioned is the more strategic question whether the shared service center fits within the business model. In other words, was the creation the shared service center based on a ‘me too’ decision of was it part of well thought about strategy. Take for example UPS and FedEx.

UPS en FedEx deliver both packages, but have a totally different business model. UPS has one standard process and does not allow for many exceptions. This standardization allows them to provide a relatively cheap service. The disadvantage for the customer is less choice. FedEx allows for more differentiation within its processes, providing a wider choice to its customers. It uses flexibility to compete. In other words, the SSC concept fits better within the business model of UPS than FedEx.

This does however not mean that there is no room for centralisation and shared services within FedEx. IT services like email and F&A services like invoicing and bookkeeping can be shared without causing tension with the operating model. The extent of the centralization and standardization differs however as it has to be aligned with the core of the business model. And this is where things tend to go wrong within quite a few organizations. In an effort not stay behind, the creation of a SSC becomes an aim by itself. The damage this may create differs.

Lets take a shared service center for information technology as an example. Was maybe 5 percent of the business activities automated twenty years ago, the percentage today may be up to 80 percent. Especially organizations in this last category should be wary not to see IT as the non-value utility is used to be twenty years ago. Business and IT processes have merged together to a level where both cannot be seen independently anymore. The IT-intensity of the business processes is therefore an important driver related to the success of an IT SSC: any mismatch (and resulting financial damage) between the business model and the design of the SSC will be enhanced due to the high IT dependence of the business processes)

Besides the level of IT intensity is also the level of complexity and business dynamics of great importance. Dynamics in terms increasing competition, shorter time-to-market of innovations and increased complexity of products, processes and regulations. Recent research by Colemen Parks indicated that 90 percent of the senior managers surveyed expect the business environment to remain very volatile and 80 percent thinks the flexibility of both business and IT should therefore increase further. The impact of the increasing complexity and business dynamics is organization specific, but expect both profit and non-profit organizations to be affected by it.

The IT intensity of the business process and the dynamics and complexity are closely related to the business model, as the business model describes how the organization creates, delivers and captures value. At UPS and FedEx the business model has been translated properly into their shared service strategy, but there are many organizations out there lacking this crucial alignment. These are the organizations which see the creation of decentralized IT-departments two or three years after the establishment of the shared service center. Standard services are still delivered by the SSC, but when technology is really important for the business, the business managers choose to take care of it themselves.

The result is (hidden) IT cost and a bad image within the business of the shared service center. In more extreme situations, the difference between business demand and supply is such that the business unit builds its own IT department again (this can typically only be pulled off by the business units with the large margin/revenue).

In other words, shared services can definitely add value, but it is no standard solution. Not today, but even less tomorrow.