Shared Services and Outsourcing Evolution Into a Hybrid Model

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By Bill Frech

Partner & Managing Director, CFO Services North America TPI

Shared Services and Outsourcing —

Evolution Into a Hybrid Model

March 2008

INTRODUCTION

For more than two decades, companies competing in the global economy have continually refined how to best meet their corporate goals — agile manage-ment, operational efficiency and cost control — while ensuring that their organizations added customer value. For functions perceived as non-core to the busi-ness, companies have generally tried what originally seemed radically different approaches to improving these operations — either internal shared services or external outsourcing.

Most recently, companies have learned that these approaches are not radically different; instead, they are closely related. Both approaches use some of the same tools, methodologies and steps toward improvement. Today, organizations are combin-ing these two operatcombin-ing models into a flexible, new “hybrid” that reduces risk and cost — while further maximizing benefits such as improved leveraging of capabilities and expertise — and enables the compa-ny to extend service into new areas by providing im-proved service levels, responsiveness and adaptability. The hybrid gives a company the flexibility to deter-mine what should be outsourced and what should be kept in house — a company can adjust its business ap-proach to run a shared services model like an internal service provider; and when it is more advantageous, a company can select offerings from outsourcers. This paper examines the steps leading to the devel-opment of this hybrid and discusses its essential char-acteristics. The paper also suggests specific actions that your company can take to fully exploit the po-tential of this operating model and helps you assess which way your company is leaning and why.

BACKGROUND

The concept of shared services blossomed in the 1980s when companies like GE and Digital Equipment Corporation led efforts to standardize systems and business processes and to drive cost reduction. Shared services continued to expand and evolve through the 1980s and 1990s, incorporating good business practices such as Six Sigma, service level agreements and chargeback for services.

As shared services and outsourcing delivery methods developed, they frequently traveled down separate and distinct paths, primarily for philosophical rather than practical reasons. Although both methods deliv-ered similar services in a comparable fashion, their re-spective proponents viewed them as markedly sepa-rate solutions. For example, the majority of attendees of shared service conferences in the mid 1990s com-monly viewed outsourcing of operations as sacrilege, especially if a shared services operation could per-form the function.

However, during the past few years, many companies have overcome this philosophical impasse and are realizing tremendous benefits through implement-ing a hybrid approach that exploits the best of both sourcing options. They can use outsourcing to harness the skills of professionals who are expert at standard-izing and transforming routine transaction process-es; and they can use shared services to transform and standardize processes the company views as too risky or too core to outsource. Further, in a hybrid sourcing model, the shared service organization functions as the perfect “home” for the organization, governing both shared service and outsourced operations.

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A HYBRID MODEL

The hybrid model reflects how shared services and outsourcing have evolved from an emphasis on cost reduction to one of process transformation — an evolution that reinforces the organization’s efforts to support business improvement and globalization. TPI has observed this development during the past five years. In particular, we have noted that compa-nies have come to realize that selectively outsourc-ing transactional work that was not unique to their business or that had already been outsourced by oth-ers in their industry was often the most astute and least risky course. A new “best-of-breed” model was emerging in a shared services / outsourced context. This insight also aligns with TPI’s awareness that out-sourcing deals are becoming smaller, enabling clients to “test” the outsourcing market by outsourcing one process area (e.g., Accounts Payable), while moving a more sensitive process to a shared services operation. Using this approach, the client can outsource non-core areas, achieving the benefits quickly and achiev-ing a solid record of successful outsourcachiev-ing, while simultaneously improving and adding rigor and con-trol to more sensitive processes.

Companies have expanded on this approach fur-ther by taking activities that could be “standard-ized” across the company, outsourcing the routine work while moving to a shared service center the ar-eas that are core or vastly different among business units. Within the Order to Cash function, for instance, a company could outsource accounts receivable and credit-checking operations but establish a shared ser-vice organization to perform the customer interface operations of order-taking and collections. In a dy-namic hybrid model, the client might take the next

logical step and continue to standardize and docu-ment the retained order to cash processes within the shared services operation and, eventually, outsource these process areas after standardization.

TPI’s deep experience with all sourcing solutions pro-vides a distinct perspective into both internal and ex-ternal (outsourced) operating models. Best practice shared services is much more than just consolidating similar activities or centralizing them in one location to facilitate efficient internal operations. We have ob-served that the most successful shared services op-erations must be organized and run like a business whose objectives are market competitiveness in pricing and service and responsiveness to customer needs. The company adopting this approach will de-liver the quality services required to support the busi-ness through a sourcing strategy that combines the best internal and outsourced service delivery capabil-ities under a single governance structure. Clients con-sidering the implementation of a hybrid model must ensure that their shared services operation has the following characteristics:

Clearly defined governance structure Clearly defined processes and process boundaries

Well-defined and meaningful service level measures

Business-oriented management

GOVERNANCE IN A HYBRID ENVIRONMENT

Governance is a critical component of the hybrid model. In general, the governance structure for a shared service organization is very similar to the gov-ernance organization needed to work with a service

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provider. Therefore, a combined governance struc-ture resident in the shared service organization is a natural fit that should enable management to over-see relations with the outsourcing provider(s), admin-ister internal shared services and support its custom-er base.

Here is a likely scenario of how the governance or-ganization evolves. A company that outsources an IT component develops governance associated with the IT organization. If the company decides to out-source Finance & Accounting (F&A) processes as well, its next logical step would be to combine the gover-nance structures for F&A and for the outsourced IT component. Whether or not the IT provider and the F&A provider happen to be the same provider, the two interact — and the areas of interface must be managed consistently.

Finally, in this scenario, the result is that the compa-ny may have a shared service organization that sup-ports parts of F&A or IT, and that both the shared ser-vices group(s) and the outsourcing provider(s) must interact with F&A and IT customers. The combined governance function provides significant value: it fa-cilitates consistent and efficient interaction with the customer base; and it ensures that communication with, and management of, the internal shared service center and the provider(s) are handled consistently, with the touch points between IT and F&A more ef-fectively managed.

EFFECTIVE SHARED SERVICES MANAGERS

Hybrid shared service staffing should include the fol-lowing roles: shared services managers to oversee the operation; functional managers to run the

inter-combined transformation efforts; and financial ex-perts to review the vendor charges and establish and calculate internal chargeback.

The hybrid shared service manager plays the most critical role, ensuring that the operation is success-ful and that business benefits are obtained. Hybrid shared services managers must possess the same competitive characteristics as any business owner who provides quality customer services. Successful hybrid managers must be adept at managing large and diverse internal operations as well as outsourced service providers. They serve an equally important function as change agents who can educate their cli-ent business units about the value and mechanics of transforming, outsourcing or insourcing a process or function.

Reporting structure is another vital factor in guar-anteeing success. Hybrid managers must occupy a strategic place within the organization’s reporting structure. This role will enable them to understand business unit needs and priorities and to fairly rep-resent these needs against competing requirements from all parts of the company. Reporting structure must also position them organizationally so that they are not perceived as “belonging” to one function within the company.

Once an organization operates an effective and effi-cient hybrid model, companies typically expand the scope of services into other business areas, including support of areas in the company’s commercial or rev-enue-generating operations.

Because this hybrid model is evolving, it poses a for-midable challenge to those who must manage it. For most companies, a very small pool of internal leaders

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this role. It may be difficult to convince someone with this skill set that a good career move is to assume re-sponsibility for implementing this hybrid. Some com-panies are experienced at promoting their managers and guiding them along this development path; oth-ers are just beginning to learn how to develop quali-fied managers — a challenge they will need to meet to compete effectively in a global environment

CONCLUSION

The hybrid model offers an organization optimum benefit from using a combination of external and in-ternal solutions. To obtain the greatest advantage from the hybrid, companies must maintain a solid, ex-perienced management team, support processes for communicating and managing service relationships inside and outside the enterprise and sustain clear goals and a strong customer focus.

In various client engagements, TPI has applied its ex-pertise to support multiple function assessments and design, through to the implementation of sourcing solutions and their ongoing management. Typical cli-ent scenarios include:

Clients may be operating shared services organization or operating in decentralized environments and are seeking for sourcing strategies. TPI works with these client execu-tives to assess needed sourcing programs and collaborates with them to define the best sourcing strategies for their organiza-tions. Then, TPI often teams up with them to put the model into practice.

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Clients are already operating a hybrid model and are seeking advice on how to improve their operations or are considering bringing more areas into the scopes of services provid-ed. In these instances, TPI provides the skills and experience the clients need to expand their structures while ensuring that controls are in place and risk is reduced.

To benefit from a sourcing strategy such as the hy-brid model, companies must lay the proper founda-tion with clear goals and objectives and a solid plan. The risk-benefit equation with a hybrid depends on a company’s internal evolution, its ability to make in-formed business decisions and its commitment to managing the process.

LOOKING FOR A STRATEGIC PARTNER?

TPI’s Shared Services experts can help you achieve your organizational goals through objective advice, knowledge of your industry and experience with sourcing arrangements from simple to complex. Looking for a strategic partner? Contact Bill Frech, Partner & Managing Director, CFO Services

North America, TPI, at +1 610 772 1101 or [email protected]. For more information, visit www.tpi.net.

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ABOUT THE AUTHOR:

Mr. Frech is a Partner and Managing Director of CFO Services in North America. An accomplished finance and accounting and information technology (IT) professional with considerable experience in Australia, Canada, China, Europe and Poland, Bill advises TPI’s clients on a wide range of aspects related to their sourcing alternatives, providing expertise in evaluating, negotiating and implementing service agreements for large, multi-national corporations. His knowledge derives from practical experience in lead-ing transaction efforts for multi-billion dollar transactions and leadlead-ing due diligence for global acquisitions.

Prior to joining TPI, Bill worked at Capgemini in several senior management roles, including Vice President of North American Business Process Outsourcing, Vice President of Shared Services Consulting Asia Pacific, Partner and Chief Operating Officer Joint Venture (for a client in Hong Kong), and Senior Manager of Support Services. In these roles, he led sourcing transition efforts with TXU and HydoOne, formalized Capgemini’s global delivery model around three key global centers in Canada, Poland and China, and led the due diligence for the acquisition of Capgemini’s global business process outsourcing delivery center in Eastern Europe. In addition, he defined global offerings, worked with industry analysts, directed marketing collateral development, and defined tools and methodologies. Bill holds a Bachelor of Arts degree in Biology from the University of Rhode Island and a Master of Science degree in Marine Science from the University of South Carolina.

ABOUT TPI: TPI, a unit of Information Services Group, Inc. (ISG) (NASDAQ:III) is the founder and innovator of the sourcing advisory industry, and the largest sourcing advisory firm in the world. We are expert at a broad range of business support functions and re-lated research methodologies. Utilizing deep functional domain expertise and extensive practical experience, TPI’s accomplished industry experts collaborate with organizations to help them advance their business operations through the best combination of business process improvement, shared services, outsourcing and offshoring. For additional information, visit www.tpi.net.

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Shared Services and Outsourcing Evolution Into a Hybrid Model