Shared Services
Shared Services is an organizational strategy where specific business functions are consolidated into a central unit to serve multiple internal business units, aiming to optimize resources, reduce costs, and enhance efficiency and consistency.
Tumisang Bogwasi
Tumisang Bogwasi
What is Shared Services?
The concept of shared services in business involves consolidating specific administrative or support functions from various business units into a single, centralized entity or department. This consolidation aims to optimize resource utilization, reduce operational costs, and improve the quality and consistency of service delivery across the entire organization.
Organizations adopt shared services models to achieve economies of scale and leverage specialized expertise that might be duplicated inefficiently across different divisions. By centralizing functions such as human resources, finance, IT, and procurement, companies can streamline processes, implement standardized best practices, and gain greater control over operational expenses.
The implementation of a shared services center (SSC) requires careful planning, significant investment in technology, and a robust change management strategy. Success hinges on clear service level agreements (SLAs), effective communication between the SSC and the business units it serves, and a continuous focus on performance improvement and customer satisfaction.
Definition
Shared services is an organizational model where specific business functions are consolidated and centralized into a dedicated unit to serve multiple internal business units, thereby improving efficiency and reducing costs.
Key Takeaways
- Shared services centralizes administrative and support functions to serve multiple business units.
- The primary goals are cost reduction, improved efficiency, and standardization of processes.
- Common functions consolidated include HR, IT, finance, and procurement.
- Successful implementation requires clear SLAs, technology investment, and effective change management.
Understanding Shared Services
Shared services operates on the principle of specialization and standardization. Instead of each business unit having its own HR department or IT support team, these functions are managed by a single, specialized team or center. This allows for the development of deep expertise within the shared services team, leading to more efficient and higher-quality service delivery.
The model often involves treating the shared services center as an internal service provider, with business units as its customers. This necessitates clear communication channels, performance metrics, and service level agreements (SLAs) to ensure that the needs of the business units are met effectively and efficiently. The transition to a shared services model can involve significant technological upgrades, process re-engineering, and cultural shifts within the organization.
By pooling resources and standardizing procedures, organizations can achieve significant cost savings through economies of scale. This also frees up business units to focus more on their core competencies and strategic initiatives, rather than being burdened by routine administrative tasks. The centralized nature also allows for better data management and reporting, providing a clearer overview of operational performance.
Formula
While there isn’t a single universal formula for shared services, the core financial benefit is often measured by the reduction in operational costs and improvement in efficiency. A simplified representation of the cost-saving objective could be:
Cost Savings = (Total Cost of Dispersed Functions – Total Cost of Centralized Shared Services) – Investment Costs
This formula highlights that savings are realized when the cost of operating the centralized shared services unit is less than the combined cost of maintaining the functions across individual business units, after accounting for the initial investment in setting up the SSC.
Real-World Example
A large multinational corporation with distinct divisions for manufacturing, retail, and R&D might centralize its accounts payable, payroll processing, and IT help desk functions into a single Shared Services Center (SSC) located in a lower-cost region. Instead of each division having its own team processing invoices and paying employees, one dedicated SSC handles these tasks for all divisions.
The SSC utilizes specialized software and standardized workflows to process transactions efficiently. Business units submit their financial data and employee information to the SSC, which then manages the payment and payroll cycles. The SSC operates under strict SLAs, ensuring timely and accurate processing, while the business units benefit from reduced overhead and can focus on their core operations.
This centralization allows for greater leverage with vendors, optimized use of technology, and a consistent employee experience for payroll and HR inquiries across the company. The overall operational cost for these functions is significantly lower compared to maintaining separate departments in each division.
Importance in Business or Economics
Shared services are crucial for businesses seeking to enhance operational efficiency and reduce costs in a competitive global market. By leveraging specialization and economies of scale, companies can achieve significant savings, which can then be reinvested into growth, innovation, or improving customer value.
From an economic perspective, shared services contribute to the broader trend of organizational optimization and resource allocation. It reflects a strategic approach to managing internal operations, aligning them with the company’s overall strategic objectives and financial goals.
The adoption of shared services can also lead to improved compliance and risk management by standardizing processes and controls across all business units. This consistency is vital for organizations operating under complex regulatory environments.
Types or Variations
Shared services can be categorized based on the functions they encompass and their operational scope. Common types include:
- Business Process Outsourcing (BPO): While not strictly internal shared services, it shares similar goals of centralization and cost reduction by outsourcing functions to third-party providers.
- Internal Shared Services Centers (SSCs): These are dedicated internal departments that provide specific services (e.g., HR, IT, finance) to multiple business units within the same organization.
- Global Business Services (GBS): An evolution of SSCs, GBS often takes a more integrated and strategic approach, consolidating a broader range of services globally and focusing on end-to-end process ownership and transformation.
Related Terms
- Business Process Outsourcing (BPO)
- Center of Excellence (CoE)
- Economies of Scale
- Organizational Structure
- Service Level Agreement (SLA)
Sources and Further Reading
- Gartner: Shared Services Glossary
- PwC: Shared Services and Outsourcing Trends
- Deloitte: Shared Services and Outsourcing Advisory
Quick Reference
Shared Services: A business strategy where specific administrative and support functions are centralized in one unit to serve multiple internal business units, aiming for cost reduction and improved efficiency.
Frequently Asked Questions (FAQs)
What are the main benefits of implementing shared services?
The primary benefits include significant cost reduction through economies of scale, improved efficiency and productivity by specializing functions, standardization of processes leading to consistency and quality, and allowing business units to focus on their core competencies.
What types of functions are typically included in a shared services model?
Commonly centralized functions include Human Resources (HR) for payroll, benefits administration, and employee onboarding; Finance for accounts payable, accounts receivable, and general ledger; Information Technology (IT) for help desk support and infrastructure management; and Procurement for purchasing and vendor management.
What are the potential challenges in adopting a shared services model?
Challenges can include resistance to change from employees and business units, difficulties in standardizing diverse processes, the need for substantial investment in technology and training, potential service quality issues if not managed properly, and ensuring effective communication and alignment between the shared services center and its internal customers.
