Background to the need for shared services
The never ending squeeze on resources following the longest global economic downturn in recent years, sovereign debt and corporate lay-offs has focused attention more than ever before, on the need for all establishments in all sectors of the economy to take a long hard look at not only the product or services they provide but also processes involved in their production and to think radically on the best way to cope with budget cuts without adverse impact on their operations.
In the public sector for instance, it is generally agreed, that although some services are desirable, they are not essential. Even for those services considered essential, such as those supplied to vulnerable groups, questions are being asked, fresh reviews undertaken and service provisions subjected to various tests of cost efficiency under gigantic microscopic lenses.
The IPF (2006) suggests shared services as one means of improving cost efficiency in public sector bodies. This article revisits the idea and suggests that in the face of current economic conditions, the idea could be extended beyond the public sector to particularly small private sector organisations. It seeks to re-examine the benefits and potential barriers towards its adoption and the steps involved in successfully designing and implementing a shared services arrangement.
The Concept of Shared Services
The concept of shared services/costs involves organisations working together in corporate and transactional areas such as procurement, human resources, Information Technology, Legal services, Auditing etc, in order to improve economies of scale in the delivery of those services thereby improving performance and increasing the size of the bottom-line. The idea first came to prominence in the 1980s and 1990s when Information Technology (IT) and Human Resources (HR) were among the first functions to be subjected to shared services (or outsourcing) regime. These were quickly followed by Legal Services, Facilities Management, Finance and Auditing functions.
The main drivers of the trend towards shared services in the UK were initially the central government targets for improving public sector efficiency and advances in technology that made it easier to share information. But more recently, the downward spiral in economic activities necessitating greater urge to survive in the market place by reducing costs and increasing profitability has been an added impetus.
Shared services look to consolidate corporate, administrative or transactional services but differ from outsourcing because it does not involve the transfer of control over the delivery of such services to another body. Shared services are often governed directly by participating organisations so that the benefits of outsourcing can be achieved without the problems associated with losing control of the provision of the service.
The paper argues that introducing shared services involves a lot of hard work in managing the change but if organisations adopt the right strategy and weigh up important decisions carefully it will be worth the effort. It justifies this by balancing the hard work involved against the following potential benefits which are not only financial but also non-financial.
Long term benefits of Shared Services
The benefits of shared services go beyond helping organisations to survive cuts in budgets but also include other long term benefits such as the opportunity to deliver considerable gains in efficiency and performance. But it is important to ensure that there is a strong business case before beginning any shared services initiative. Once a proper business case has been established, implementation needs to be planned and administered correctly. It is only then that the financial and non-financial benefits could be realised.
A major benefit of shared services is cost savings. This could be in the form of lower accommodation costs by moving to a single site, fewer management overheads or cheaper procurement through aggregated demand and greater purchasing power. The UK Government Treasury report Operational Efficiency Programme (OEP), published in April 2009 estimates that the public sector can achieve a reduction in back office annual costs of around 20–25% (or £4bn of the approximate £18bn spend) over a three year period and produce savings of 20% in IT costs (equating to £3.2bn of £16bn). Similar levels of savings could be achieved in other organisations outside the public sector, especially small to medium sized companies, if the idea of shared services is adopted. More importantly, in addition to the financial benefits, there are other non-financial benefits that could be realised.
A major benefit of shared services is the increased efficiency it brings. ‘Efficiency’ here should be interpreted in a wide sense. It is argued that shared services can deliver better corporate performance and improved service outputs by establishing better processes, producing quality management information and introducing greater professionalism into corporate and transactional functions.
A shared service initiative can act as catalyst for beneficial change in organisations, for example, better management information should improve decision-making and help identify where problems occur
within business processes. Senior management are freed up to focus on more value added activity such as developing strategy, improving front-line services, responding to the changing environment and delivering key objectives within their own departments and organisations.
Overcoming the Hurdles to Shared Service Development
A number of factors, including significant variation in standards and processes across organisations may constitute major obstacles to effective sharing of services.
Without a fundamental change in existing organisational constructs, capabilities and training, finance shared services and Business Process Outsource (BPO) implementation can disappoint. While costs are reduced, increasing strategic focus, transforming the finance function, and facilitating globalisation may be more elusive (ACCA 2011).
IPF (2006) identified the potential problems associated with implementing shared services and grouped them into four main categories – partner selection, staff buy-in, ICT issues and programme and contract management. It suggests that these hurdles can be overcome if the organisation has effective leadership, adopts good change management techniques, and chooses the appropriate model for implementation. For example, staff scepticism could be overcome by seconding staff to the shared service rather than deciding to outsource.
As a general rule, organisations should focus first on sharing those services that are least likely to prove problematic. This would include those that are process-based or staffed by competent individuals which are unlikely to cause controversy.
Shared services have the potential to deliver significant benefits in terms of reduced costs and improved corporate performance. Though originally conceived within a Public sector framework, it has the potential for wider application beyond public sector organisations. If well planned and properly implemented, it could generate long term benefits with significant impact on the long term sustainability of organisations.
Increasing numbers of finance executives are already changing their delivery models by setting up finance shared services operations as one of the tools for reducing base costs or improving bottom lines on the face of global sovereign and corporate debts.
Omusa Baba Ohyoma BA(Hons), MBA, FCCA, ACA is Chairman of the Institute of Chartered Accountants of Nigeria (ICAN) UK District, Financial Secretary of the Nigerians in Diaspora Europe (NIDOE) UK South and founding member/former Vice Chairman of the Central Association of Nigerians in the UK (CANUK).
IPF (2006). Shared services: The opportunities and issues for public sector organisations.