It’s time to challenge the ideology of shared services
By Tim Casserley and Akos Csernus
We became involved in the world of shared services and BPO (business process outsourcing) in the early 2000’s. The idea of transforming service delivery by centralising back office support functions and sharing their delivery across business units had taken off across Europe, but the debate about its value and relevance persisted, even among the big consultancies. Fast forward to the present day, and pretty much all dissent has been airbrushed out of public discourse. The few remaining big consultancy studies that cast doubt on the efficacy of shared services transformations have disappeared.
Nowadays, you will find much discussion about how to avoid the pitfalls of implementation, but little that questions the basic, underlying assumptions of shared services. This is odd because, contrary to consultancy spin, the benefits of consolidating and standardising back office processes and bringing them together (at one or several sites) are neither clear cut nor self-evident. In our experience, it depends on your organisation’s context (geography, people, culture, leadership, history and so on) as well as the challenges it is facing. We’ve worked with businesses for whom shared services and/or outsourcing worked spectacularly well, as well as those for whom it was an abysmal failure – the quality of implementation had little or no bearing on the outcome.
It seems that the shared services approach (and its outsourcing or BPO equivalent) has entered the realms of management ideology. The danger with ideologies, in the management world as elsewhere, is that they attract followers who are intolerant of alternatives and compelled to impose their beliefs, be they relevant to other’s context or not.
We believe the shared services ideology is out of control. It’s time for us to rethink service delivery models and move beyond the false binary choice of shared services or outsourcing and their guiding principles of standardisation, cost reduction and economies of scale.
How it all started (the importance of context)
GE (General Electric) and DEC (Digital Equipment Company, now part of HP) are reputed to be the first companies to create what would be recognised nowadays as shared services organisations[i]. Both reported huge benefits. GE implemented shared financial and accounting services in 1984 and claimed a staff reduction of 30%. DEC created shared financial services in 1985 and reported annual savings of between $40 and $50 million. While very different in terms of industry and organisational culture, the two companies had one thing in common. They had charismatic leaders with a strong sense of purpose who were exceptionally clear about the kind of culture they wanted to create. As a result, both were able to adopt new operating models with a high degree of conformity. Jack Walsh’s persistent pursuit of competitiveness at all costs was coupled with a strong command and control culture. Ken Olson’s culture of innovation empowered employees who adopted new ways of working because they believed they were, ‘doing the right thing’. Establishing shared services in an organisational context that invites a high degree of alignment is considerably easier than attempting to do so in one that encourages independence and self-determination. We suggest that the early success of the shared services pioneers owes more to their context and culture than any inherent virtue in the shared services approach – a disconfirming detail that remains largely overlooked by the advocates of the approach to this day.
Birth of the shared services value proposition – four elements
Over the years a combination of external drivers such as globalisation and technology innovation, coupled with the inventiveness of the big consultancies have shaped the shared services proposition into a compelling market opportunity. An apparent no brainer promising a veritable gold mine of cost saving possibilities.
In order to understand what has gone terribly wrong with this apparent organisational nirvana, we need first to understand the core elements of the proposition.
The name ‘Shared Services’ was created by the association of two terms in which ‘Shared’ represents most of the value proposition and ‘Services’ is seen as contributing relatively less. These core elements of the proposition can be summarised as:
Consolidation: the bringing together and co-locating of activities and people from disparate business units to assert more control on staff and their work by using specific organisational structures and HR practices.
Standardisation: in order to embed a more stringent control environment by codifying activities as part of an intentional sequence or process, documenting them for the purposes of instruction, accountability and audit. Standardisation is often enabled by large scale technology implementations such as ERP platforms. These are widely seen as an effective way of ensuring compliance with standards and controls by reducing dependence on human intervention.
Cost effectiveness: usually the part of the value proposition that is given most emphasis and which provides the lion’s share of the business case. Cost effectiveness is assumed to derive from more effective control of costs, such as headcount management, IT assets and physical infrastructure (e.g. seat and space utilisation), as well as economies of scale. It is assumed that scale will automatically lead to lower unit costs.
As a service: the 'Services' side of the proposition which refers to activities provided as a service to other parts of the organisation. The services are enshrined in formal Service Level Agreements (SLA’s) made up of key performance indicators (KPIs) that hold the shared service organisation to a certain level of quality and frequency. The SLA’s are used as a representative measure of customer satisfaction and a way to control internal activities, people's performance and risk in terms of customer liability.
Deconstructing the value proposition
By and large, what is being consolidated in a shared services operation is back office support functions. Self-evidently, this requires the splitting of front office from back office, an idea that emerged in the 1970’s and applied early twentieth century manufacturing techniques to an office environment[ii]. “The less direct contact the customer has with the service system”, so the theory goes, “the greater the potential of the system to operate at peak efficiency”[iii]. Accordingly, service delivery is standardised into different levels, separating those providing customer contact (front office) from those providing the expertise to solve customer issues (back office). What invariably ensues is loss of a clear line of sight to the end customer together with an absence of purpose. Once de-coupled from the customer they are ultimately serving, employees have little sense of the significance of the service they are providing. In addition, the operation is designed to create human production lines and apply industrial controls on behaviour – conditions that crush the human spirit and drive considerable stress, burn-out and employee turnover. All of this results in what John Seddon calls ‘failure demand’ – an increase in customer ‘demand caused by the failure to do something or do something right for the customer’[iv].
The loss of a clear line of sight to the customer is amplified by the fragmentation of larger, more coherent work processes. Business processes are broken down into their constituent elements. These fragments are then assigned to employees who specialise in doing them. The link to the value delivered by the end-to-end process is lost. The result is a highly specialised, transactional, efficiency focused operation that loses all sense of larger systemic interdependencies and customer impact.
Having broken the work into chunks, the next logical step is to impose a high level of command and control. A strict hierarchy is introduced – indeed the number of AVPs, VPs and SVP’s in a typical large offshore SSO or BPO organisation borders on the ridiculous. These management levels add little or no customer value but serve to create a highly status conscious culture that further obscures a line of sight to the customer. Employees feel isolated and receive little feedback on how their work is impacting their clients. The multiple management levels reinforce a culture of elitism where career progress is reserved for the few, generating high levels of employee frustration and turnover. Knowledge is lost, learning curves repeated and service quality fluctuates. Customer satisfaction drops.
In our experience, creating standardised ways of working for services which are highly regulated and compliance driven makes a lot of sense. Some forms of accounting fall into this category as well as payroll and simple administrative processes. Regulatory compliance is improved as well as customer satisfaction, at least for those services where customers expect a standardised, consistent, unvaried outcome. In terms of managing payments, for example, whether we are employees or suppliers, we all want to be paid the right amount, on time, and on a consistent basis.
But it is quite another thing to try to standardise highly complex services or those that require individual customisation. Employee relations and talent management falls into this category in the HR field, as well as customer relationship management and complaint handling. Why is it disastrous to try to standardise complexity? Because complexity in a service environment is manifested by a high degree of variety in customer demand. Attempts to standardise variety inevitably push costs up, because of the repeated failure to meet customer needs. This leads to an escalation of failure demand.
One of the most demoralising aspects of standardisation is its rigid focus on the codification and documentation of work processes. The intention behind this is not to clarify the value in delivering a service to a customer, rather it is to assert yet more control over the work done. The result is a morass of meaningless, legalistic documentation that actively discourages collaboration and service innovation.
But fear not, because of course all of this can be resolved by the introduction of a huge, enterprise wide, common, IT operating platform (or ERP)! Indeed, the need for some kind of IT system is guaranteed by the division between front and back office and the inherent complexity involved in separating the two, particularly when, as often happens, they become geographically separated.
This is usually the turning point for most shared services operations. The point at which all semblance of retaining an unwavering focus on internal activities as services rendered to internal or external customers disappears. The rigidity of the large ERP system implementations takes over, and everyone becomes focused on ensuring the implementation does not fail, which 90% of the time it does.
Self-evidently, sharing resources means less resources are used. This creates some cost savings, although often only marginal ones due to the limited flexibility of the installed cost base (real-estate, for instance, or large IT systems). So, the dominant rationale in most shared services business cases is that shared services delivers lower transaction costs. This comes about as a result of the fabled notion of ‘economies of scale’. Sadly, there is seldom any empirical evidence underpinning this assertion. Indeed (as John Seddon argues passionately[v]) the whole idea of economies of scale is an evidence free zone. It is a popular economic belief with no evidential substance. A sort of urban myth dreamt up by lazy economists. In fact, focusing on transaction costs has the reverse effect. It pushes costs up because of the consequent rise in failure demand.
We believe it is pure folly to make economies of scale the 'holy grail' of shared services. It is a very poor substitute for true value creation. A focus on lowering transactional costs often disguises larger issues about 'what and why' and makes the entire service irrelevant – while at the same time driving a large amount of failure demand, resulting in higher total cost of ownership.
What keeps these ventures on the road, given their often repeated failure to achieve cost efficiency, is simply labour cost arbitrage – which tends to melt as fast as April snow in the high inflationary environments of emerging economies. The burden of heavy overhead costs as well as high manual effort ratios and failure demand renders them unsustainable in the long run.
As a service
The rigidity of the typical service contract between SSO or BPO organisations and their clients results in a race to the bottom, with both parties chasing transactional cost efficiencies. This is a zero sum game, where one party’s gain is the other’s loss. Contracts are usually long term (five to seven years is the norm) and yet activities, performance measures, productivity and cost outcomes are defined at a very detailed level. While this gives clients the illusion of control, it also stifles collaboration, innovation and customer centricity. What emerges is a rigid and largely transactional client-vendor relationship where everyone watches their own back; a far cry from a partnership based on trust and strong relationships.
Inordinate attention is given to measuring everything, using previously agreed KPI’s. The amount of time and effort involved in monitoring these incur additional cost. And, sadly, they seldom measure the right things – those aspects of service that really matter to the customer. Instead, measurement is focused on helping the service provider defend their commercial interests.
The roots of failure: the thinking underlying the shared services approach
The origins of the shared services approach can be traced back to early twentieth century industrial thinking. Frederick Taylor’s ideas about industrial design, first introduced by Henry Ford on the Model T assembly lines in the 1920’s form the intellectual bedrock on which the shared services concept has been built. Ford’s approach to dealing with variety is famously summed up in his comment that the customer can have ‘any colour, as long as it’s black’. This has about as much relevance to the service environment of today as flat earth cosmology has for modern physics. Indeed, you would be hard pressed to find a well-run manufacturing operation that still uses a Taylorist approach these days. Given the prevailing business obsession with personalisation and hyper segmentation in the service sector, it is even more absurd to be using such archaic ideas.
Taylorism and its modern day equivalents perpetuate a view that organisations are like machines that can be controlled by pulling the right levers to get the right results. But organisations are not machines, nor are they systems or organisms – to think of them in this way is to imbue them with a false concreteness; a reification. Organisations are nothing more than groups of people locked in interaction with one another, pursuing a common endeavour, but often drawn apart by competing agendas and intentions.[vi]
The machine view of organisations reduces employees to the level of human robots (or ‘FTEs’ in the language of the shared service organisation) and creates the opposite of good work[vii], driving high turnover and low morale. It is informed by a management approach that sees humans as resources and cogs in the machine – cogs that need to be controlled through ‘carrot & stick’ measures to avoid variable output and fluctuating productivity. The irony is that all of this is intended to increase efficiency and reduce unit costs, when, in reality, it increases failure demand and drives costs up.
Shared services – a case of the emperor’s new clothes
We believe it is time for the shared services approach, as it was originally intended and designed, to be unmasked. Like HC Andersen’s famous fable, “No one believes, but everyone believes that everyone else believes”[viii]. But unlike the fable, this ‘pluralistic ignorance[ix]’ has been widely disseminated by the big consultancies (and some academics), many of whom have generated huge revenues in the process.
The shared services approach is a relic from a world of thought that is neither relevant nor helpful to the service delivery challenges of the present day.
And yet, like any change process, shared services programmes have had as many unintended as intended consequences. Some of the former have been generative and created real value for customers as well as employees. Consolidation, for instance, has meant the co-location of cross functional teams, greater diversity and inclusion and more exchange of ideas, leading to service innovation. Investing heavily in enabling technology and hiring large numbers of millennials has created centres of digitally literate employees capable of using technology in new and different ways. Pulling arcane back office activities out of the shadows and identifying what, if any, customer is being served by them has helped make service providers more accountable. It is in these unintended consequences that the seeds of an alternative future for the shared services project exist.
In our next article, we’ll be exploring the current orthodoxy about the future of shared services operations, why we think this is misled and suggesting an alternative direction.
[i] Davis, TRV (2005), “Integrating shared services with the strategy and operation of MNE’s”, Journal of General Management Vol 31 No. 2
[ii] Chase, RB (1978), Where Does the Customer Fit in a Service Operation? Harvard Business Review
[iv] Seddon, S (2003), ‘Freedom from Command and Control: A Better Way to Make the Work’, Vanguard Consulting Ltd.
[v] Seddon, S (2010), ‘Why do we believe in economy of scale?’, Vanguard Consulting Ltd. [https://s3.amazonaws.com/connected_republic/attachments/33/Why_do_we_believe_in_economy_of_scale.pdf]
[vi] See for example, http://www.billcritchleyconsulting.com/images/Downloads/BCC---D1.pdf and https://www.youtube.com/watch?reload=9&v=E-c0Ih19taE and https://informalcoalitions.typepad.com/informal_coalitions/2010/04/a-complex-social-process-view-of-organizations---1-dynamic-conversational-networks.html
[vii] Taylor, M (2017), ‘Good work: the Taylor review of modern working practices’ Department of Business, Energy and Industrial Strategy [https://www.gov.uk/government/publications/good-work-the-taylor-review-of-modern-working-practices]
[viii] Hansen, JU (2011), ‘A Logic-Based Approach to Pluralistic Ignorance’, Academia.edu.