Fair Share

Dec. 21, 2004
Companies streamline support services through consolidation.
During the last decade, corporations have searched for ways to slice, dice, and chop costs from their operating budgets. Organizations have developed far more efficient manufacturing techniques, better inventory controls, and sophisticated computer systems that can automate a dizzying array of processes. The one thing that almost all companies have overlooked is how to consolidate and streamline various support services -- accounts payable, payroll, legal, real estate, and human resources -- in order to gain efficiencies of scale and provide a higher level of service. At least that's the way Dan Henderson sees it. The vice president and general manager of business services at AlliedSignal Inc. is on a mission to make the Morristown, N.J., company a model of corporate efficiency. Five years ago, the 70,000-plus-employee company combined more than 75 functions into a shared service center spanning five functional areas, including finance and HR. Today, about 1,100 employees provide services to the entire AlliedSignal organization and 400 outside customers. That has saved the corporation about $300 million during the last five years. "Shared services is a way to build organization excellence. It's a way to focus on total quality and lower costs at the same time," he says. A growing number of companies are discovering that it's profitable to share. By consolidating various functions in a single location and processing all transactions and claims en masse, it's possible to reduce -- if not eliminate -- much of the redundancy and overlap that plagues the typical corporation. "Shared services offers tremendous economies of scale," says Steve Stanton, managing director at Hammer & Co., a Cambridge, Mass.-based consulting firm specializing in reengineering. Adds John B. Garbarino, team leader for human resources at Arthur Andersen, Sarasota, Fla.: "It has quietly evolved into an important strategy for driving improvement throughout an enterprise." Indeed, many organizations have found that it's possible to reduce administrative costs anywhere from 20% to 50% by identifying the most efficient way to deliver a particular service and then creating a customer-oriented mind-set. But shared services is more than a method for cutting costs. As Garbarino points out, the idea is to reduce inefficiency, save money, and actually improve customer service. Many large companies -- including AlliedSignal, General Electric Co., Royal Dutch/Shell Group's Shell Oil, Unisys Corp., Eastman Kodak Co., Hewlett-Packard Co., Johnson & Johnson, and IBM Corp. -- have embraced the concept, which first appeared on corporate radar screens in the late 1980s. "The question is: what is the most efficient way to get a task done, and how can an organization understand the value and costs associated with it?" says Garbarino. Michael Sternesky, vice president for the Americas region at Shell Services International Inc., says shared services is composed of two main components: consolidation and business transformation. Each can pay dividends alone, but the sum is always greater than the parts. "It gets to the heart of the relationship between cost and quality," he explains. "It's about business-process reengineering, customer satisfaction, and how to build relationships that are more efficient and professional." At Shell Services, the focus on efficiency has led to one of the largest shared-services organizations in the corporate world. Approximately 5,000 employees span an array of competencies, including human resources, finance, procurement, and other administrative services. The organization, headquartered in Houston, accounts for $1 billion in sales. More importantly, the revised business structure has helped Shell Oil pare costs by 30% to 40%, Sternesky says. The toughest part of the equation, notes Sternesky, is taking costs out without compromising quality. At Shell Services, that required careful attention to reengineering processes, training workers, and empowering managers. It also meant using activity-based costing to break tasks into individual components in order to view their actual cost and value. At that point, it was possible to understand core competencies and noncore competencies and make decisions about how to structure the organization. Michael Sutcliff, a partner in Andersen Consulting's Finance & Performance Management practice, believes that shared services is "blowing apart the barriers that previously constrained organizations. When it's done right, it allows an organization to guarantee customers a specific service level at a specific price and find the least expensive way to deliver the services. It lets an organization do the work where it should naturally be done." That's a concept that hasn't been lost on AlliedSignal's Henderson. By creating a central source for handling transactions as well as developing highly specialized experts in various disciplines, the company has reduced costs, boosted customer satisfaction, and developed better controls. Case in point: By centralizing travel functions, finance specialists now can track the total amount of money the entire company spends, which airlines and hotels employees use, and which departments fail to purchase tickets seven days in advance in order to maximize cost savings. That alone has reduced the annual travel expense from $200 million to $155 million. More importantly, it has helped the company put expertise where it belongs and eliminate vast inefficiencies that were caused by duplication of personnel and effort. AlliedSignal has been able to consolidate functions from 385 locations organized around 11 strategic business units. Payroll, for example, has become a single point of contact rather than 50 different operations scattered around the world. Using a single PeopleSoft system, the corporation has been able to eliminate dozens of stand-alone hardware and software systems that previously required HR and IT staff. No less significant is the fact that all employees receive checks on the same pay cycle. That has helped build the business-services operation into a $250 million enterprise staffed by administrative personnel as well as specialists at nine global sites. Workers in the rest of the company now are free to concentrate on core responsibilities. "Today, professionals in various departments and divisions are far more involved in business analysis, strategic planning, pricing practices, mergers and acquisitions activity, divestitures, and high level business intelligence," says Henderson, a former CFO for AlliedSignal's engineering-materials sector. "These functions have evolved and taken on a far more efficient form." Indeed, surveys indicate that employees who use the service are increasingly satisfied. In 1994 customer satisfaction ranked 3.2 on a 1-to-5 scale. When AlliedSignal revisited the issue last year, the approval rating had spiked to 4.3. One of the major reasons for the improvement, says Henderson, is that the firm has turned to help desks to resolve internal customers' questions and problems. It now tallies more than 145,000 calls each month. "In the past people didn't know where to call or where to turn, and they wound up wasting time on the phone and filling out paperwork. Today, that happens a lot less often." Not surprisingly, lifting people out of various plants and depositing them in a central location requires a good deal of adjustment. When AlliedSignal embarked on the project in 1994, it looked for individuals who would fit into the new environment and then provided a two-and-a-half-day orientation followed by ongoing training. With 650 employees initially descending into the shared-services operation, creating the right mind-set was paramount. "The people and the thinking can make or break a shared-services organization," Henderson explains. "People must have a customer-service focus and understand why a shared-services project is important." Putting all the pieces together can prove an enormous undertaking, notes Andersen's Garbarino. It's a process that can take months of planning, require careful selection of people and locations, necessitate a hefty training budget, and demand the unwavering support of management. In fact, without appropriate buy-in from management -- and at least one senior executive to carry the torch -- it's easy for a shared-services project to be derailed before the train ever leaves the station. "Many companies have set up shared-service centers and failed miserably," Garbarino points out. "When you examine the companies that excel at the concept, it looks like a slam dunk. Many of them save millions of dollars a year by consolidating and reengineering operations." But shared services is never an easy implementation, he adds. "It cannot be done in a cookie-cutter fashion, and it requires leadership that thinks strategic. A bean-counter mentality doesn't hack it." Garbarino believes that a focus on human resources is central to any program's success or failure. He insists that the staffing emphasis must be on smart, enthusiastic, and creative people rather than those who merely have experience. "Shared services requires people who can think and solve problems," he states. Nevertheless, cross-training and multifunctional knowledge are key ingredients in the success of a shared-services program. When Unisys, Blue Bell, Pa., opted to establish a shared-services program in 1992, it focused mostly on centralizing activities in order to gain economies of scale. By 1998 it had five transactional processing centers -- three in the U.S., one in the Netherlands, and another in Australia. Handling everything from order entry to credit and collections, from payroll to accounts receivable, the program has slashed costs by about 50% and reduced the time needed to process transactions. During the last couple of years, Unisys has begun to leverage the effort further by developing global standard practices and systems across international boundaries. It also has begun to use metrics to specifically track processes and identify areas ripe for reengineering. "We have moved beyond handling transactional processing more efficiently into completely reengineering processes," explains Janet Haugen, corporate vice president and controller for the 32,000-plus-employee firm. Unisys has relied heavily on implementation teams at a local level to spearhead the effort. And while the company remains sensitive to cultural issues and barriers, says Haugen, it also has established baseline practices and requirements for all its shared-service centers. "We want to identify the issues that are country- or labor-force-specific and come up with a fix rather than try to design each program from the ground up by a different set of standards." For many companies, the ultimate issue when considering a shared-services approach is whether to establish an internal business-services division or outsource many of the functions. Sternesky argues that such a decision can be made only on a case-by-case basis and only after understanding the real costs and organizational competencies that enter into the picture. Yet, regardless of what direction a company takes, he says that it's a huge blunder to dismiss shared services as an ancillary, noncore initiative. "It's all about the business focus surrounding essential services," he remarks. In fact, Sternesky and others that have adopted shared-service centers believe that we've witnessed only the first wave of firms embracing the concept. "As companies attempt to become more efficient and eke out greater profits, they are looking for new ways to improve how they handle processes," he says. "Shared services is a 21st-century model that aligns the needs of the business with its internal customers."
Making It Work
Shell Services International Inc. offers the following 10 steps for building an effective shared-services business model:
  • Build the case for change.
  • Create an honest, credible vision.
  • Identify allies and champions.
  • Understand and manage customer expectations.
  • Build strong communication channels.
  • Develop an implementation plan that supports transformation.
  • Develop people who deliver what customers want.
  • Execute the plan to ensure operational excellence.
  • Instill a track-and-learn mentality.
  • Celebrate successes early and often.
Reasons For Sharing
Some functions suited to shared services: Aviation services Business supplies Property accounting General ledger Purchasing Travel reservations T&E processing IT and computer services Real-estate services Relocation Training Work/life program administration Compensation planning Payroll Retirement benefits Food services and meeting planning Child-care facilities Security

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