Optimize your Running Cost with a Shared Services Organization
The costs of support functions are often measured globally and allocated to the profit centers in proportion to the analytical rules, which may be different for each function.
This heterogeneity of arbitrary rules does not meet the need for transparency and increased cost monitoring that we are seeing more and more. It also hinders the implementation of tools to control the efficiency of operations.
The shared services approach transforms support functions into internal suppliers, billing the real consumption of other customer departments. The company’s costs become transparent and comparable.
What are the 3 benefits to expect from the implementation of a shared services organization?
· Better budget visibility through Activity-based Costing and implementation of performance, profitability, and quality indicators
· Improvement of the Cost/Income Ratio and optimization of the support functions thanks to a standardized and measurable Product/Customer Fit
· Increased visibility of the real profitability of business lines and facilitation of the best allocation of investments
What is a shared services organization?
Shared services enable the company’s support functions, usually considered as cost centers, to be transformed into internal service providers.
Each of these internal providers has a list of available services, and each of these services has a metric, with an associated unit price.
Internal customers are then billed according to their actual consumption of each of the services offered, and the terms of a service agreement signed beforehand.
As opposed to an analytical distribution of costs to profit centers, the shared services organization allows central functions to optimize their processes and expenses, to achieve economies of scale through standardization, and to remain competitive with the outside world since unit prices provide tangible elements for comparison.
For their part, profit centers have a better vision of their profitability and an increased capacity for budget forecasting.
And in concrete terms, how do shared services work?
Depending on the initial situation, setting up a shared services organization can lead to more or less significant changes.
A SSO is built around two main processes:
• Annually, the budget is reviewed to recalculate the unit price of each of the services, as well as the budget forecasts, both for suppliers and internal clients
• Every month, the invoices corresponding to the consumption of internal customers are presented and validated. The actual figures are then compared to the budgeted figures, and action plans are put in place in the event of excessive variations
We are therefore entering into a real client-supplier relationship, and for it to be efficient, a SSO requires the creation of three key functions:
• The Relationship Manager is the main contact for internal customers within the SSO. He/she coordinates between the customer, the billing entity, the service managers, and plays an advisory role vis-à-vis the customer to optimize his/her consumption.
• The Service Manager is responsible for the management of the services offered by the SSO. He is responsible for the efficiency of unit prices and the quality of his services. Every month, he/she leads the process of collecting consumption data
• The billing entity is the administrative platform of the SSO. Annually, it coordinates the unit price update process, and monthly, it leads the billing process
The objective is to set up a truly customer-oriented organization.
What operational benefits can be expected from a SSO?
The benefits of moving to SSO mode are multi-faceted.
First, a SSO allows the company to improve the management of its internal service offers, by defining standardized offers, setting up consumption capture and forecasting tools, and introducing a commercial dimension to exchanges between suppliers and internal customers.
Secondly, a SSO makes it possible to improve the company’s budget management. Indeed, the annual calculation of unit prices requires a budget modeling, such as Activity-based Costing (ABC). In addition, the implementation of budget management tools, at the monitoring and forecasting levels, and the invoicing of departments according to their actual consumption, are all elements that enable a better analysis of the profitability of these departments or business lines.
Finally, a SSO pushes the support functions to improve their performance, in particular through the implementation of indicators (KPIs) and the increased possibility of optimizing its processes, using for example Lean and Six Sigma methodologies.
We talk about processes, optimization, customer orientation, Lean, Six Sigma… Is the implementation of a SSO part of a continuous improvement approach?
A shared services organization is part of a logic of operational efficiency and continuous improvement, the objective of which is to offer more transparency to internal customers and a better understanding of their needs by internal suppliers.
So, implementing a SSO would open the door to multiple complementary improvements?
Indeed, implementing a shared services organization is a major step forward compared to a traditional analytical model, but is not an end. The model is a real open door to the optimization of its operations and is completely scalable.
A SSO can evolve towards process optimization, including automation projects, straight-through processing (STP), performance management, and the launch of Lean or Six Sigma programs, in order to increase efficiency.
Cost optimization is also possible, for example by reviewing procurement policies to renegotiate with external suppliers. And the ability to compare with outside suppliers can open opportunities for third-party application management or outsourcing/offshoring.
Finally, it is possible to increase the scope of a SSO, or to revise its legal structure in order to leverage tax incentives, or to outsource it.
How does the implementation of a Shared Services Organization (SSO) work?
Depending on the scope and the starting point, the implementation of a SSO can be more or less complex and more or less transforming. In general, for a large company or a small or medium-sized enterprise, projects last between 5 and 15 months and take place in 5 stages, in parallel with a good Change Management initiative:
• Analyze the existing organization
• Define the issues and objectives of the target organization
• Assessing resistance to change
• Identify the risks of project failure
• Define the service offering as well as the metrics and production capacity of each
• Put in place tools that will allow the measurement of the real consumption of the customers
3. BUDGET & CHARGEBACK
• Define the cost of each service using an ABC (Activity-based Costing) approach
• Deduct the unit cost of each service
• Identify and implement budget forecasting and monitoring tools
• Identify and set up tools and procedures for internal re-invoicing
• Define the legal setup of the SSO
• Identify and appoint billable service owners, business partners and billing managers
• Provide training
• Write and publish procedures
• Adjust the model through one or more shadow billing exercises
• Identification of the impacts on the different business lines (Winners & Losers) and management of these impacts
• Implementation of the model
• Definition of the strategic axes of evolution and continuous improvement
Initially published on arnaudrioche.net