By George Vukotich & Kathy Iverson

Some organizations have created a myriad of internal support functions to bolster those operating areas that provide direct service to customers. Others have chosen to outsource many of their support functions. Initially, these options were seen as a means of cutting costs. In the last few years the most progressive organizations have performed the proper analysis to evaluate these options and have selected the proper balance which is best for them. This is not only in terms of cost savings but also in leveraging strategic capabilities and adding value while maintaining control over key areas. This article focuses on those internal support functions, shared services, which the whole organization can call on for strategic support.

Initially internal support areas played only a small role in the overall organization’s function. Recent initiatives such as quality management, empowerment, and team-based structure have required extensive use of support services. Today, shared service providers have grown and diversified to a point where they demand a significant portion of the operating budget and have wide-reaching authority. With growth there has been conflict. Operating areas criticize support services for poor delivery and high cost. At the same time, support areas struggle to maintain high performance standards while faced with the constant threat of reduction of resources and outsourcing.

An additional affliction of this widespread expansion of support areas is functional redundancy. As support services have grown, departments performing the same or similar activities independently of one another, result in unnecessary overlap and additional cost. For example, one division of the company may ask information technology to design a production management system to increase efficiency and share data by utilizing the organization’s Intranet system. If IT operates independently of the functional business area, they may reinvent a product that has previously been developed and delivered by another division or support area. Such redundancy is not limited to process, but can also include talent. Skill sets of support staff may be duplicated unnecessarily, resulting in increased cost and the underutilization of staff. Some ways to eliminate redundancy are to create cross-functional teams and have individuals from various business units and functional areas work together. Another area that is helping facilitate the sharing of information and learning’s throughout the organization is through knowledge management.

Repetition in organizational functioning has evolved from a culture that facilitates competition, not cooperation. Various business units seek to guard their individual functions and the power they amass, even though opportunities for collaboration exist. Business units may even create "shadow organizations" where resources are hidden or known by a different name to allow them to maintain control and avoid sharing resources. For example, a functional business unit may bypass assistance from Information Technology and have one of its own workers develop a new accounting system. Although the system might be of significant value to other operating units, the area conceals its new development, running it on a stand-alone PC. The risk in such a scenario lies with both elevated costs due to both repetition of process and misuse of talent. The worker assigned to develop the new system may spend many initial hours just getting up to speed on the technical process. Other risks include system incompatibility, lack of integration with other functions in the organization, and poor disaster recovery. Such outcomes undermine overall corporate strategy. A mechanistic structure results in missed opportunities for consolidation, reduced economies of scale, and few opportunities for sharing best practices. Instead, support services must seek to increase their horizontal linkage to overcome barriers between business units and better coordinate their activities. As organizations face greater uncertainty, the need for horizontal linkage increases.

Several daring organizations have challenged functional redundancy and sought to both reduce operating costs and increase excellence in their support areas by creating internal business alliances. These organizations have realized a significant reduction in cost, with savings of up to 50 percent reported by U.S. organizations and 30 to 40 percent savings in European companies. The shared services strategy creates mutually beneficial business connections or strong horizontal linkages between internal entities to leverage and add synergy to individual core capabilities. These alliances span several support areas including organization development, training, human resource management, accounting, purchasing, and information technology. Shared services is based on the development of a unique service provider-recipient relationship. Internal customers are treated with the same care and respect as external customers. They specify what services they need, when they need them, and how much they can afford to pay. Shared services works within these boundaries to deliver cost-effective, quality products.

The shared services approach involves building rich connections between similar parts to reorganize the current system to better meet the challenges posed by new demands. Patterns of order emerge as internal service providers are realigned to create a strong value chain that better serves both internal and external customers. Mutually beneficial coalitions create added value for the organization by reducing the cost associated with redundancy and by fine-tuning functions to create consistently high-quality service.

Evolution of Shared Services

Organizations that have successfully implemented a shared services approach to support management include AlliedSignal, Honeywell, Owens-Corning, Duke Energy, and Arthur Andersen. In each instance, the change process is an evolutionary one, with new knowledge and expertise gained along the way.

Initially, the value contribution of shared services was thought to come from cost reduction alone. Over time, service providers realized that quality was just as important as cost. Rather than concentrating efforts on cost cutting and consolidation alone, emphasis changed to the importance of value creation by shortening cycle time, reducing cost, and increasing their provision of services that meet customer needs.

Strategies for Implementation

As described above, the transformation to a shared services structure is achieved by way of an evolutionary process, not an abrupt restructuring. Most initiatives begin with a focus on cost reduction. Duke Energy literally changed to shared services overnight when the old system expired on December 31, 1997 and the new operation began the next day. With hindsight, Duke Energy advocates a transition plan that allows ample time for start up, business development, and client acquisition. The steps outlined below provide general implementation guidelines for the shift from decentralization to the formation of an integrated support structure.

Step 1: Capture top management support

As with all change initiatives, top management must buy into the reorganization if success is to be achieved. More often than not, the decision to restructure support areas receives strong endorsement from organizational leaders due to its potential for significant cost reduction. Leaders must decide if the focus of the initiative is to be on cost, product leadership, customer relationship, or, ideally, all three.

Step 2: Create a change team

Gather members of various support areas to guide and champion the change process. This team will play a key role in the development of a shared services approach by creating and monitoring a process for change.

Step 3: Thoroughly assess current competencies

Prior to reorganizing, a complete and accurate assessment of each support area must be performed. Specific products, knowledge, and talent must be inventoried so that both key resources and skills are identified and redundant functions recognized.

Step 4: Reorganize to create horizontal linkages

Restructure if necessary to reduce redundancy in services and talent. Identify an individual or department that will act as the integrator of support services. This person or department, depending on the size of the organization, will span the boundaries between departments to form liaisons and coordinate projects that may require the participation of several support disciplines. Integration is the key to the successful management of support services. Without it, the newly reorganized areas will simply revert back to their old independent mode of operation.

Step 5: Market the support services concept

Support services must create a marketing campaign that will not only sell the members of the organization on the value of the reorganization, but also begin to generate an internal client base. Information must be disseminated throughout the organization so that all will understand the new concept of support services and will realize its potential benefits.

Step 6: Evaluate and adjust as needed

Shared Services requires continuous assessment and improvement if it is to realize its full potential in cost reduction and quality enhancement. Evaluation can take the form of feedback from internal clients, support staff members, and external client groups. A variety of assessment methods should be used including surveys, focus groups, and interviews. Such rich data will guide the evolution of shared services as it becomes a highly functional, well-regarded segment of the organization.

Shared Services in Action

When organizations adopt a shared services approach, support staff work closely together to serve all areas of the company. Operating units are no longer viewed as areas to be controlled, but become the "internal customer" and are treated as such. Shared service providers must market themselves and their services, often competing with external providers. They can no longer depend on a captured audience, but must maintain a client relationship with their internal customers who demand the highest level of product quality. As such they must identify what is important to their clients and develop a strategy. Integrators may be referred to as account managers or product managers. They meet with operating areas to explore their needs and generate business for support areas. Account managers hold frequent customer requirements workshops with operating areas to identify their need for products and services. Since no one individual can thoroughly understand all support areas, account managers often bring in specialists from other areas during the negotiation and planning stages. Account managers must span boundaries within the shared services organization to locate the best product and talent to achieve a particular task. They create proposals and communicate the cost of products and services to operating line managers. To remain competitive with outside vendors, account managers must stay close to their external customers to identify gaps in operation processes that support areas might bridge. It is important to communicate benchmark data to the client in order to establish performance measures. Account managers must not only recognize their clients’ current need for services, but anticipate their future requirements.

Lessons Learned

During the development of shared services many important lessons have been learned as the process has evolved over the years. Experience is always an excellent teacher, and the knowledge gained by many organizations through trial and error will certainly benefit other organizations as they seek to integrate their support areas to an even greater extent in the future.

Lesson 1: Cost reduction alone will not create customer satisfaction.

Initially, many organizations thought that the primary concern of their internal customers was to reduce the cost of support services. They quickly realized that product quality was just as important as cost reduction and now focus on delivering the best services at the best price, without cutting corners.

Lesson 2: All services do not have equal value.

Each client must be examined individually to identify required services and to map out a delivery plan. The cost of services must be set accordingly, with no one formula used to calculate the cost of services from all support areas.

Lesson 3: Strong relationships solve many problems.

Just as external customers must be pursued actively, so must internal clients. Knowledge of customers needs, responsiveness in service, and continuous feedback all create strong client relationships.

Lesson 4: Integrated solutions add the greatest value.

The true value of Shared Services is its potential for integrating a wide array of internal services to meet client needs in a way that no external vendor could. This cannot be achieved without key individuals who possess boundary-spanning knowledge of all support areas with the vision to package integrated products.

Lesson 5: Communication and measurement are the key to continued success.

Continuous improvement comes from open lines of communication with client groups who constantly gauge their performance, allowing Shared Services to quickly make improvements and adjustments as the need arises.

As internal service providers are called on to both reduce costs and increase product quality, a shared services approach to organization and delivery offers these once extraneous areas the opportunity to become fully contributing corporate partners. This integrated approach to service delivery creates an opportunity for these areas to truly support operating lines, as they were originally meant to. Operating areas become clients and are treated as such. At the same time, support areas gain a level of credibility and respect within the organization that was often unreachable in the past. Shared services is a win-win prospect, creating a value chain of excellence. As support areas deliver service more effectively and efficiently to internal customers, operating areas in turn are able to elevate service to external customers, creating opportunities for increased profitability and growth.

About the Authors

George Vukotich, Ph.D. has spent the last 15 years working in and consulting on issues related to Organizational Development. His work has been for organizations that include; Motorola, Amoco, Booz, Allen & Hamilton, IBM, Andersen Consulting, and Computer Sciences Corporation. His research efforts focus on Organizational Culture and its relationship to Leadership and Strategy in a Changing environment. He can be contacted at gvukotich@aol.com.

Kathy Iverson is a professor of Organizational Development at Roosevelt University. She consults to a number of organizations in the area of strategy, structure, and performance. Her ongoing research work is in how to make organizations more successful by utilizing people strategies.

Dr. Iverson has a Ph.D. in Training and Organizational Development from Loyola University in Chicago. She is the author of two books in the area of service in the hospitality industry and has written a number of articles that focus on organizational structure and performance.