Sharing The Wealth

Sept. 11, 2005
Shared service centers offer more than just consolidation of services -- when planned correctly.

In 2000, $2.4 billion Alliant Techsystems (ATK), a developer of advanced weapons and space systems based in Minneapolis, Minn., operated several dozen plants in 22 states. Just about every location was supported by at least one human resources employee.

The company was growing by acquisition -- ATK would go on to snap up seven companies within two years -- and managers were concerned about redundancy in the human resources function. In addition, because plants dotted the country, corporate policies were not administered consistently. For instance, one plant might allow the use of paid time off for doctor's appointments, and another not.

"Overall, we want a corporate philosophy that applies to all employees, so that there is a sense of equity across locations," says Brenda Byron, director of human resource shared services for ATK.

What's more, human resources staffers' time often was consumed by such tasks as answering employees' questions about vacation time and holiday schedules. That limited their ability to provide strategic support to the business units. To better use its human resources employees while supporting the business units, ATK moved to a shared services approach for some human resource and benefits functions. The company launched an online portal using Authoria HR, through which employees can access corporate policies and access and update their own benefits information. Because not all employees have easy access to computers at work, ATK also opened a call center.

Since 2000, ATK has grown from 6,800 to 14,000 employees. All are supported by an in-house shared services staff of 27. Control has improved because information is made available to employees through one centralized database, Byron says. "Everyone is reading out of the same book."

As ATK's experience illustrates, shared-service centers (SSCs) can offer the ability to cut costs, streamline processes and enhance control. However, they have to be designed to meet specific goals. Otherwise, the functions for which the center is responsible are apt to creep back to non-SSC staff, nudging up costs and loosening controls.

Sometimes shared-service centers use in-house staff; other times the function is outsourced. Regardless of model, key to the effectiveness of a SSC is its ability to survive based on an economic model like any business, says Andrew Kris, chair of the advisory board of the industry group, the Shared Service and Business Process Outsourcing Assoc., Orlando, Fla. He defines a SSC as an activity within the corporation that delivers a range of services that others value, at a cost, quality level and speed that are competitive with alternatives.

When this occurs, a SSC approach offers compelling benefits. Cost reduction or containment is one. Darcy Volk is general manager with Blue Bell, Pa.-based $5.8 billion Unisys Corp.'s shared-service center in Bismarck, North Dakota. The internal center processes accounts payable (AP) and travel and entertainment (T&E) reimbursements for the company's operations in 44 countries. Volk says that when the company transfers an operation to the SSC, it typically can staff the center at about one-half the level required when the operation is handled by employees in the field.

Equally important, particularly post-Enron, is a company's ability to enhance control and ensure that employees are following corporate policy by concentrating transaction processing in one location.

Getting Started

Before establishing a SSC, management needs to determine whether one makes sense.

  • A shared service approach typically works best with transactions that are "high volume, similar and repeatable," says Richard Sypniewski, practice director for accounting and finance operations with Parson Consulting, Chicago. Like Unisys, many operations start with AP and T&E.
  • Next up is identifying objectives and the way in which they'll be met. "To some extent, it's fashionable to have a shared service center, but many people haven't figured out why," notes Mark Beard, treasury consultant with JP Morgan Chase, New York. For instance, if cutting costs tops the list, executives need to determine where and how costs can be shaved.
  • Obtaining executive buy-in also is key. Moving functions from several locations to a central operation will prompt resistance from employees worried about their jobs, Kris says. Unless the shift is championed from the top, it's unlikely to get off the ground.

At ATK, for instance, about 30% to 40% of employees resisted the change. Many production workers who don't have daily access to computers aren't as comfortable using them. Some employees still continue to ask a human resources employee to update their benefits forms, rather than making the changes themselves.

To remedy this, the company has made the system accessible from employees' homes and asked the human resources employees to practice "tough love" and help employees use the system, rather than doing it for them, Byron says.

  • Along with management support, clear, consistent communication can keep employees' concerns and suspicion from exploding. Establish a program management office that can spearhead online and print communication focused on the shift, says Sypneiwksi. The goal is to convey the idea that this will be a part of the organization going forward. The office also can field calls or e-mails from employees with questions.
  • When filling leadership roles for the SSC, it's best to look for individuals with general management skills, advises Kris. Of course, managers need an understanding of the services they're providing. More importantly, however, they need to assume the role of account managers, and develop strong client relationships.

That's because it's a focus on providing the services the business units need, at the quality they require, that differentiates a shared service operation from simply centralizing operations. "You can't forget that the local controller needs certain information to run the business," says Michael Fossaceca, senior vice president and head of corporate sales for treasury services with JP Morgan Chase, New York.

"Operations still occur at the business unit level."

Increasing Accuracy

Another key element is a data management group, says Dirk Blevi, executive vice president and general manager, Europe, with Cabot Corp. Cabot launched a European SSC in 2003 to handle such processes as order-to-cash and procure-to-pay. With about 85 people, the center supports 17 locations across seven European countries. Boston-based Cabot, with $1.9 billion in revenue, produces specialty chemicals and materials.

"The data management group is independent from sales, logistics and purchasing," Blevi says. "They ensure the integrity of the data." For instance, SSC staff check that the price negotiated for each product and customer is reflected in the database. Similarly, they ensure that prices Cabot pays suppliers reflect any agreements negotiated.

Keeping these functions separate boosts both accuracy and control. Salespeople aren't able to unilaterally offer customers special deals. Similarly, purchasing employees can't inflate the prices of goods in order to divert money.

Since opening the SSC, Cabot has met its goals of reducing costs, improving controls and providing better service to its internal customers, although Blevi adds that improving service remains an ongoing objective.

Cabot's SSC shares an attribute common to all world-class SSCs: continually measuring performance against internal and external benchmarks, and committing to improving operations, says Penny Weller, senior business adviser with Atlanta-based The Hackett Group. "World-class shared service organizations are metrics-based and continually measure improvement," she says.

Unisys SSC employees, for instance, regularly perform quality audits. Each year, the center processes about 1.5 million transactions, Volk says.

When companies announce an upcoming launch of a shared service center, employees often wonder whether that means jobs will head to low-cost workers overseas. Data on the extent to which this actually is happening vary. On the one hand, "It's hard to get a seat now on a plane going to India," says Ben Trowbridge, CEO and managing partner with the Dallas-based consulting firm Trowbridge Group, referring to the number of U.S.-based companies that have established shared service operations in India.

See Also...

To Insource Or Outsource
However, offshoring is not a universal solution. A 2005 Hackett Group survey of more than 50 large corporations with median revenue of $7.1 billion didn't find a rush to overseas SSCs. "The data doesn't support anything but minimal movement to either offshoring or outsourcing on any grand scale at this time," Weller says.

Cabot, for instance, decided against a move to India or China almost from the beginning, Blevi says. Given the company's size, the benefits would have been marginal, he adds.

Focusing solely on wages doesn't indicate the extent to which a company will save money. In studying the issue several years ago, JP Morgan's Beard found that 10% to 15% of the cost savings possible with SSCs came from lower labor costs, while 60% to 65% came from re-engineering processes. "If you move to an SSC but use the same processes and systems, you'll only get a fraction of the benefits," he says.

Some companies look to rural areas of North America to benefit from lower costs closer to home. Such locations often offer a "thoroughbred workforce," that is well educated and hard-working, says Linda Butts, director of economic development and finance with the North Dakota Department of Commerce.

Granted, Butts isn't exactly a disinterested party here. However, a number of executives apparently agree with her. In addition to Unisys, companies establishing SSCs in the state include insurer Aetna/US Healthcare and grain giant Cargill.

The strong workforce was a particular attraction for Unisys, says Volk. "A primary factor is an educated, motivated and available workforce." When hiring, Volk and her colleagues ask candidates to describe a time they had to resolve an unhappy customer's complaint. "We're very persistent in getting interviewees not to talk in generalities," she adds.

No matter where the center is located, a focus on performance and meeting customers' needs is key to success. "The people that lead shared services have to have a passion for process efficiency, delivery and performance," Weller says.

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