New Life for Shared Services?
Posted by markhrobinson on November 25, 2008
A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance
While the impact of the economic crisis and the results of the US election on the outsourcing industry have attracted much attention (including some from me), there has been little consideration of the consequences for the shared services movement – which is somewhat remiss of us all. I will try to make amends for that neglect in this post – and incidentally, for those not sure what shared services means, or not sure what this writer intends when referring to shared services, please refer to my Defined Words and Terms page.
To set the scene, my thoughts on shared services arise out of the following set of general assumptions regarding key economic and socio-political trends:
The Economic Context
The economic crisis will impact every enterprise, whether public or private, by constraining revenue and restricting the availability of capital. Constrained revenue (whether from lower sales volumes at lower prices or from reductions in federal, state, local and charitable funding) means that support services must be cut back and/or performed at lower cost. Restricted access to capital means that project activities must compete harder for funding, will be required to meet a higher business case threshold for approval, and will in many instances be deferred. Many private sector enterprises will experience large scale forced restructuring through bankruptcy (or in an attempt to stave off bankruptcy), with plant closures, layoffs, divestitures. Others will be acquired (or will be making acquisitions) as consolidation accelerates in many sectors in pursuit of sufficient scale to ensure survival.
The Socio-political Context
The probable impact of the US elections is harder to assess, but based on campaign promises and subsequent events, several consequences seem likely:
1. The public sector, and private enterprises heavily dependent on the public sector, will find that outsourcing generally (and outsourcing to offshore destinations specifically) is discouraged, if not outright prohibited.
2. More stringent oversight and more binding regulation will be imposed upon the banking and financial services industry that will both increase the cost of being in those industries, and make it harder to outsource the effort required to assure compliance (by extension of principle, other currently regulated sectors, such as health care, life sciences, energy, transportation, broadcast media and telecommunications, may also see tighter regulation).
3. The federal government’s rescue packages will come with strings attached that will both apply restrictions to the use of the funds and at the same time seek performance improvements from the enterprises accepting the funding.
4. The US tax climate is likely to become less favorable for business over time, making it harder yet to deliver acceptable returns for investors and applying additional pressure on back office costs.
5. US consumer spending is unlikely to recover quickly while the affluent consumers that account for a disproportionate share of consumer activity remain unsure of the scale and timing of promised tax hikes
Implications for the Shared Services Movement
So now we have a contextual framework, what does it all mean for the shared services movement? Both public and private sector enterprises will continue to feel a squeeze that requires them to improve the efficiency of their back office business process – in the case of the public sector, to release funds to support programs that would otherwise have to be cut, and in the case of the private sector, to remain profitable or minimize losses in order to survive until better times return. The use of outsourcing generally will be limited in the public sector, and offshoring specifically will all but disappear. In some areas of the private sector, outsourcing generally, and offshoring specifically, will be subject to some new controls.
This will result in increasing acceptance of shared services solutions in the public sector, and a new lease of life for shared services solutions in the private sector, as impacted enterprises seek to drive out the necessary efficiencies without resorting to outsourcing. However, to some extent the shape of shared services initiatives may change. One tool that has been readily available, the creation of new offshore captives, may be harder to execute because it looks so much like offshoring. In some cases, that will result in entities retaining their existing offshore captives when they had previously been contemplating selling them off. In many cases, it will result in the transfer of significant additional volumes of work to the offshore captives, because it is a low visibility way to gain the advantages of lower labor costs. Finally, there will be some cases where because of regulatory pressures, enterprises are pressured to dispose of their offshore captives and bring their work back to the US.
Another implication for shared services initiatives (new and existing) is that they will be placed under much more pressure to accelerate the delivery of planned improvements in efficiency and effectiveness, and in many cases accept even more demanding targets, while at the same time the availability of capital to fund transformational programs is constrained. This may result in an increase in the consumption of advisory services, as in-house teams may not have the skills and experience necessary to achieve this acceleration.
To summarize, there will be increasing momentum for the shared services movement, resulting in the launch of many new initiatives and giving a fresh lease of life for existing initiatives. Enterprise expectations for the performance of shared services will be increased, and timeframes for the delivery of planned benefits will be reduced. New offshore captives may be harder to establish, and existing offshore captives may need to grow to accommodate expanded volumes, while some may have to be disposed of. The use of advisory services will grow, as enterprises seek to source the premium skills necessary to go faster and get more benefits while working with less capital for transformation.
The Bottom Line: The Shared Services Movement will prosper and grow over the next several years, but will need to deliver performance closer to that of world class outsourcing to do so. Consulting firms should beef up their shared services advisory capacity accordingly.
Copyright ©2008 Mark H. Robinson All Rights Reserved
Jamie Liddell said
Hi Mark,
Interesting post. I thought you might be interested in reading the transcript of a roundtable I recorded recently with various figures from the sourcing world including your colleague Tony Rawlinson. Some interesting and at times provocative points came up, including some strong views on the future of the captive model.
You can read the transcript at http://www.ssonetwork.com/topic_detail.aspx?id=3108&ekfrm=6 – I’d be interested in any feedback you might have.
Keep up the good work!
Best,
Jamie Liddell
Editor
http://www.ssonetwork.com
Stan Lepeak said
Mark – doesn’t the increased growth/prosperity of shared services imply that end-user organizations can now perform the activities in scope bester/faster/cheaper? I’m not sure how these capabilities have changed given the current economy and/or election results. If the growth of shared service has to date been limited by their own shortcomings (where growth has been limited) and outsourcing became a preferred, next generation service delivery model alternative, how has that changed? Or do the economics/viability of outsourcing regress to the level that shared services are preferable?
markhrobinson said
Good points, Stan – my thoughts: Yes, organizations can now perform many of their business services activities better/faster/cheaper, as they have learned from the outsourcers and also embraced best practices that have been made much more accessible through the explosion of web-based content. However, for the majority of organizations, best-in-class performance is and will remain outside their reach, simply because they cannot aggregate talent and pool assets across a broad base of clients in the way the outsourcers can, which is what has made outsourcing a preferred option for many organizations over the past decade. So to finally answer your question – neither the economic crisis nor the changing political climate have fundamentally changed the ability of organizations to perform services in house nor the capability of outsourcers to outperform in-house options (although they have impacted availability of capital and perceptions of risk). What has fundamentally changed is the cultural, social and political climate that informs organizations making sourcing decisions, which is swinging towards a less tolerant attitude to outsourcing generally and off-shoring specifically. This will pre-dispose many organizations facing the imperative to reduce costs to look at shared services solutions more seriously, because they don’t have ‘permission’ from their broad stakeholder base to outsource, and because well-executed shared services can much of the cost savings in the short-term that would be realized through outsourcing. I do want to emphasize that I am only arguing for a trend here. I expect that outsourcing will grow faster than it has been growing, simply because the volume of organizations faced with an imperative to reduce operating costs is growing at a faster pace – but I also expect that pro rata more organizations will initiate or expand upon existing shared services when faced with that imperative than was historically the case.