Finance, HR, Shared Service, Center, Business, Strategic, Value

[HROA Essentials] Can a finance (or HR) shared service center really add value?

12 Jan 2007 | (Thinking Point)

Introduction:

More and more organizations are looking at implementing shared services for Finance and HR. The trend began over ten years ago, and we have seen waves of activity. First a few private sector companies (typically US multinationals) took the plunge. Then the idea was taken up by European companies, at about the same time that global shared services and / or outsourcing were becoming common. Now many organizations are revisiting their shared services, looking at offshoring benefits; and of course the public sector is now a major area of shared services activity. Shared services are becoming ubiquitous, but organizations often struggle to understand how they add value.

By Chris Price, Partner & Ted Webb, Senior Manager, Alsbridge Europe  

As shared services require major investment, a business case is usually required to demonstrate a satisfactory return on funds invested. Invariably these business cases are based on the “hard” benefits of cost reduction (through scale economies, process standardization, flatter management structures, etc). This is the case even though shared services are often proposed for strategic reasons (often termed “transformation of the Finance / HR function”); the business cases usually make only a passing acknowledgement of the strategic benefits achievable from transformation. Consequently the business cases are often not as good as they could be, and may even show negative returns.

This article argues that there is much more value available from shared services than is recognized in many business cases. We believe that shared services solely for processing efficiency is an opportunity lost – we would almost go so far as to suggest that doing shared services just to get these efficiencies is not a good use of management time, and there are probably better ways to save money. We believe that organizations should put much more emphasis on the transformation of the function and tracking the related strategic benefits. For the reasons we argue below, this requires a greater involvement of the business in developing shared service programs, and greater understanding of how the related functions could and should contribute to the delivery of the organizations strategic goals.

Relative importance of processing efficiencies and strategic capabilities

An examination of a company’s cost base indicates the size of the ‘missed opportunity’ that results from focusing on processing efficiencies alone. Diagram 1 below shows the typical cost structure of a commercial organization. Finance (or HR) is usually about 1% of total spend. Typically savings of around 20% to 40% are sought from a shared service program; which equates to 0.2% to 0.4% savings on an organization’s total cost base. Taking into account the investment and (as everyone who has been involved in a shared service program knows) the pain involved, the resulting value is at best marginal; there are probably better ways to save 0.2% of the organizations cost base.

But Finance and HR have much more to offer the business than just cutting their own costs.

Look at the remaining 99% of the cost base. The Finance function can help an organization to be much more effective in the way that it spends its money. By the use of decision support approaches, the application of proper commercial thinking, and the use of timely and relevant management information, Finance can make a far bigger impact on the organizations total cost base than the mere 0.2% saving it can make by reducing its own cost base. Also, on the revenue side, Finance can play its part in helping the business to increase sales, reduce loss-making business, and so on. Likewise with HR. If the HR function can provide support on talent management, staff retention, employee development, and absence management, then this is far more valuable to the organization than the small impact it can make by reducing its own cost base.

So what part does shared services play in all of this?

Well, for many Finance functions their raison d’etre has been to keep proper accounting records and effective financial controls, while delivering management information. For HR, it has been about management of the administration of recruitment, leavers, staff issues, training, salaries, etc.

These activities are the basics of the function, and businesses expect them to be delivered effectively. Naturally, they are the priority for the functional leaders – unless these ‘basics’ are done correctly, the business managers are unlikely to trust the Finance and HR functions to provide more value-adding support and services.

But often, these ‘basics’ are the only (or at least the predominant) activities that the function undertakes. Occasionally due to budget constraints, or sometimes due to a lack of appropriate resources, or for historical reasons, the Finance and HR functions cannot and / or do not undertake the more value-adding activities described above.

If implemented properly, shared services can change all of this. Shared services involve the delivery of the majority of the basic transactional processing activities by a separate ‘customer focused’ entity. This gives the remainder of the function (often referred to as the “retained function”) the time and money to “transform” its role (i.e. to focus on the value adding activities, such as business partnering, decision support, etc.).

The point we are making here is this …..Why put all of the focus and rationale for shared services on delivering 0.2 percent savings, when there is so much more value to be delivered from having a “transformed” function, which involves not just ‘well delivered’ transaction processing, but a transformation in the role of the function? Shared services need to be seen as an enabler of a transformation of the function – and we would argue that unless shared services are coupled with transformation, then a huge opportunity (and benefit) will be missed.

Why are strategic / transformational benefits “forgotten”?

Responding to the strategic drivers of the business should be a major factor in developing a business case for shared services. However this is often not the case. At best the strategic benefits associated with a transformed function are referred to in a series of generalized statements and it is unclear how their delivery will be either achieved or measured. Why is this?

While management understands the concept of the Finance and HR functions being business partners that support delivery of strategic benefits, they find it difficult to quantify and then sign-up to benefits in a business case. Often the mechanisms to deliver those benefits are not clearly understood. Even if they are, there is a need to use estimates or likely ranges (or even non-financial measures). In addition, most strategic benefits require the organization to work across functions, which often causes co-ordination and ownership difficulties. Finance and / or HR may provide better analysis or more insightful interpretation, but active involvement of business operations is needed to deliver the revenue and cost improvements. Consequently there is an emphasis on benefits that can be precisely verified, and delivered within the control of one function (in other words, the hard savings in the cost of the Finance / HR function).

In an outsourcing situation, this is sometimes compounded because the service provider is only able to commit to deliver benefits relating to those areas under their control - the efficient back office rather than the more effective front office.

The implications of focusing on processing efficiency

The inevitable consequence of this is a focus on the “easy to quantify” savings from processing efficiency. As far as the retained function is concerned, the only attention it gets is in relation to the operational interface with the shared service operation and the transitioning of the transactional work to shared services. Transforming the retained function towards a more strategic, value-added role becomes low priority or is completely ignored.

As a result, three things can happen:

• First, without the inclusion of the strategic benefits the business case for shared services may fail to convince and the program may not be approved. So not only are the efficiency savings lost – so too are the strategic benefits.
• Second, the program may be labeled a failure if the cost savings in the business case are not achieved – meanwhile the strategic benefits go unnoticed, or unattributed to the program.
• Third, and arguably most importantly, the strategic benefits may not be tracked and managed at all. The cost and the pain of implementing shared services may have been just to deliver a relatively small cost saving in transaction processing.

How to make business cases more relevant

There are a number of steps that organizations can take to ensure that the strategic reasons behind a shared services program are not missed in the business case.

Step 1 - Understand the value drivers of your business.

All organizations should, as part of their strategic planning processes, regularly assess the capabilities they need to build to add value. Typical examples include, for instance, responsiveness to market conditions to hone yield management, responsiveness to changes in anticipated product demand, tight project control, etc.

Step 2 - Understand the wider value that shared services can bring.

In the light of the organization’s value drivers, the role that shared services can play in building strategic capabilities needs to be explored. In many cases, the shared service operation will form part of a transformed Finance/ HR function. This transformation will include actions such as:

• delivering more relevant, accurate and timely management information,
• improved control disciplines, and
• skills training (e.g. decision support, analysis, appraisal techniques, etc)

Some examples of the actions by which shared services have helped to contribute to strategic capabilities include:

• In a fast moving sales environment, more frequent and accurate sales reporting can enable better management of prices, offers and discounts. In one case in particular this was enabled by more accurate recording (“cut-off”) of deliveries through common standardized process, shared organization and leveraging a shared corporate tracking facility.
• In an industry in which rapid production-response and low stock-levels were key strategic drivers, the provision of integrated, timely order book information from a shared service operation enabled production management to schedule shorter production runs.
• Common categorization of expenditure across country operations can enable better comparison of costs in different countries, and ultimately a lower overhead cost base.
• In a project-based business, the provision of consistent and timely information can enable better control of project costs and/or cash flow.
• Enabling better utilization of existing resource and reduced use of temporary recruitment, through an organization-wide view of resource deployment.
• Enabling organization-wide talent management to make best and most satisfying use of skills available; also to improve retention and reduce recruitment costs.

Step 3 – Plan how strategic benefits will be delivered. What actions will be needed and who will own those actions

Once the role that shared services can play in building strategic capability is understood, you then need to know what specifically the shared service operation and the retained organization need to do to deliver enhanced capability. This may well involve focused re-engineering of the retained organization – what needs to change in terms of processes, skills, technology, data, infrastructure, and how will it change? The full involvement of the business outside the direct Finance and HR area is essential. This will reinforce the transformational agenda enabled by shared services, and maintain the shared service program as a strategic initiative. It will also ensure ownership by the business. For the retained Finance/ HR function you will need to understand what does business partnering/ professionalism mean for your business and how does it deliver value?

This will result a prioritized action plan, which identifies what needs to change and the resource that is needed.

Step 4 – Use the action plan to quantify the benefits (and investment needed)

An integral part of the re-engineering exercise and resulting action plan will be to define the metrics and targets by which success will be measured and which will be incorporated into the business case. Absolute precision may not be possible, but indicative targets can be set. Measurement and quantification are key to making informed decisions about investment priorities (or perhaps even whether to undertake the program at all), and in monitoring achievement of a program’s goals and making informed corrective actions. Quantification must be balanced across strategic drivers and not just focus on one area (e.g. processing efficiencies).

Some typical examples of how action plans can enable benefits to be estimated include investigating the following issues (these refer to the examples of building strategic capability cited in step 2 above): 

• How will the provision of weekly sales information impact the sales process? To what extent does the sales team believe pricing can be improved, if they had more timely, accurate information?
• How will the provision of better order book information impact production scheduling? What improvement in stock holding is possible?
• How will shared services support the organization to co-ordinate better procurement in future? What does a pilot exercise tells us about the different buying prices of a service) between units.
• What have been the causes of project cost overruns? How will they be controlled in future? What do project debriefs tell us about how more timely and accurate information could have avoided them?
• What is the current rate of temporary recruitment? By how much would we expect to see this reduced, if existing resource is fully utilized?
  Correspondingly, an important fact to consider relates to an organization which was able to reduce its staff turn-over from over 12% to 3% in 12 months through HR ‘Business Partners’ focusing on the staff retention after their time was freed up by implementation of an HR shared service.
• How will consolidated talent management identify internal skills and provide opportunities for development? Respectively, an organization was able to reduce contract staffing by almost 30% (£12million) as talent management in shared services was able to identify internal candidates with the required skills rather than always looking externally.

Some useful guidelines

Finally we give some basic guidelines to ensure that strategic benefits are taken seriously in shared services business cases:

• Avoid expressing strategic benefits as a long list of “motherhood” statements. They will just be ignored. It is better to focus on a limited number of key benefits and what they will mean to the business, rather than having a generalized list of vague benefits.
• Set up a workstream(s) to identify what business partnering/ professionalization means. How will processes change in the retained function; what skills will be needed? Enlist users’ help to understand how a better service level could enable better value to be obtained for the whole organization.
• Obtain acceptance (buy-in) of senior management outside Finance/ HR to the changes. If they don’t accept changes, the benefits can not be counted (because they won’t happen).
• Quantify, wherever possible, the benefits or, at least set realistic targets. Be prepared to use estimates and likely ranges. For instance, what does available information tell us about the causes of cost over-runs, what decrease in cost per unit output is possible or how do we perform against benchmarks of operational expenditure?

Conclusion

Yes, shared services for Finance and HR can add value. They usually add value in terms of delivering better services at a lower cost. However, this value is often marginal in the context of the entire organization, and the real value of shared services is the impact that they can make on improving the capability and effectiveness of the retained function.

By keeping the focus on strategic drivers at the feasibility stage, understanding how shared services will help drive value in the organization and including the benefits in the business case and realization plan; the complete value of shared services can be realized. In essence you must fully involve the business in understanding the role shared services will play in delivering strategic benefits and be ready to think laterally about how to quantify benefits.

Related Content: