The scope of functions in shared services centers now goes
beyond transaction processing activities in finance. In fact, such centers are
breaking through traditional functional silos to become business service hubs
throughout the world.
A dozen years ago, a handful of companies began consolidating
their finance functions into shared services centers. They reasoned that if you
were to handle all your transactions in a single place, you'd greatly reduce
the cost of each transaction and save millions of dollars. An additional early
goal for many was to move transaction-processing activity out of the
controller's department, so the controller could focus on being a business
partner providing value-added services.
For many companies today, the focus has shifted from efficiency to
effectiveness. In fact, the leaders in the field say there's an enormous wealth
of information in the detailed data that can be tapped for significant business
In this roundtable interview, Bob Cecil, Lee Gregory and Jan
Williams of Gunn Partners, a business process improvement consultancy with
operations in the U.S. and Europe, discuss the present state and future
prospects of global shared services.
Where does shared services stand today?
The concept has proven its worth, and the companies that pioneered it are
bringing more functions into shared services. For example, AlliedSignal
(recently merged with Honeywell), General Motors and Mobil have brought such
diverse functions as human resources, real estate and travel and meeting
arrangements into their centers. We're also seeing companies increase the value
of the concept by integrating their information systems and making end-to-end
improvements in finance and other administrative processes. As another way to
increase the value of their centers, some companies are working with their
internal customers to find the level of service that provides the best overall
value, rather than the level that costs the least.
Where does shared services stand in the United States?
Cecil: Most of the largest companies, including 16 of the top 20 on the
Fortune 500, have established shared services centers for handling
transactions. Companies too small to set up their own centers are looking into
alternatives like outsourcing and joint partnerships. The Big Five accounting
firms and a number of banks have begun offering outsourcing services.
How does Europe stand in comparison with the United States?
Gregory: Europe is still trailing the United States. The common
thread of most European companies with successful shared services centers is
their pursuit of a pan-European business model. Such companies want to redefine
themselves as European rather than as Dutch, English or German. This
pan-European vision helps them overcome age-old barriers of language and
culture. Companies with this pan-European vision are having success in setting
up shared services centers. For companies without this unifying vision, the
record is much spottier. Implementing a successful shared services center
requires the wholehearted support of all national business units. If they don't
buy into the idea - and many don't - they're in a position to delay or even
sabotage the implementation.
Is the economic turmoil in Asia affecting the development of
shared services centers?
Williams: Right now, most Asian
companies are just trying to survive; they aren't even thinking about shared
services centers. Australia and New Zealand are a different story. They're
moving into shared services very quickly. Most large enterprises - those with
$5 billion or more in revenues - are following U.S. models. These companies
have the economies of scale to pursue consolidation with just one to three
processes. But it's a different story for smaller companies - those with $1
billion to $4 billion in revenues. Because they lack the scale to justify a
shared services center for a single function, they tend to be more aggressive
in rapidly bringing functions like human resources, IT and procurement into
What about the rest of Asia? Will it follow the European
Williams: The Asian market is quite different from
Europe. There's no pan-Asian business model comparable to the pan-European
model. Shared services centers face obstacles of language, nationality and
culture, as well as enormous differences in infrastructure. To add to the
challenge, some Asian countries have laws that make the establishment of shared
services centers very difficult, such as requirements that source documents
remain in the home country. Some American multinationals are making shared
services work in Asia. Hewlett Packard and Motorola have centers in Singapore.
Hewlett Packard is planning a center in India, and American Express already has
one there. But for Asian-based companies, it's another story. Outside of Japan,
Australia and South Korea, few companies have the critical mass to justify
Once Asia comes out of its economic funk, what model are the
large companies likely to adopt?
Williams: One model that can
surmount the barriers of language, law, nationality and culture is the
hub-and-spoke approach, analogous to the operating pattern of many airlines. In
this method, the bulk of the staff work would be processed in hub locations,
but some critical activities along with source documents would remain at the
local business unit to meet legal and other requirements.
Why arent there shared services centers in Latin
Cecil: Political instability, poor transportation
systems and notoriously bad telephone service make Latin America unattractive
for shared services centers. Instead, many companies are consolidating Latin
American support activities outside the region, often in Florida where the
infrastructure and access to language skills arent issues. Still, several
multinationals with a presence in Latin America are looking into the advantages
of setting up centers there. Mexico, with its improving infrastructure,
comparatively stable government and low labor costs could soon become an
What companies are seen as the pacesetters?
Cecil: Ford and General Electric are two of the most remarkable.
Year after year, theyve continued to consolidate and to amass benefits.
Over the past 17 years, Ford has reduced its worldwide finance headcount from
more than 14,000 to about 3,000. This finance organization supports some
300,000 Ford employees and $125 billion in sales. Since 1988, General Electric
has cut its transaction staff in the United States by 75 percent. Yet this much
smaller staff is now providing analytical insights to the business, as well as
low-cost administrative work.
What happens after the initial benefits of consolidation are
Cecil: It takes most companies five years to seven years
to complete a consolidation and start to gain the full benefits of lower wage
rates and economies of scale, after which the gains start to flatten out. One
way to keep the gains flowing is to move beyond consolidation to process
improvement and information integration.
Cant companies gain these benefits without
Cecil: Trying to gain the benefits without
actually going to shared services can be risky. A number of companies that
tried that route found they werent getting the benefits they had hoped
for, and had to take a step back and implement a consolidation.
Why cant you consolidate and improve processes at the
Cecil: Actually, doing both at the same time is the
best way. Companies that have followed this approach say you gain more value
more quickly. Also, despite the difficulties, its easier to implement
such changes in processes during rather than after the consolidation.
How important are labor costs in planning shared services
Williams: Labor costs are the driving force behind
consolidation. Moving to low-wage areas is the easiest way to cut costs.
Improving processes is much more difficult, although it does offer more
Gregory: In Europe, establishing truly European
operations is the imperative. Most companies are still completing their initial
consolidation and have yet to turn their attention to improving processes.
Are restrictive labor laws and regulations an obstacle to
Gregory: Not in the United States, but they do
present obstacles to shared services in Europe, especially in Italy, France and
Arent countries that discourage shared services centers
putting their companies at a strategic disadvantage?
Since much of the employment in these countries is provided through large
national companies or smaller local enterprises, these restrictive laws
arent viewed as imposing strategic disadvantages.
terms of the savings involved, theyre correct. Savings from shared
services typically amount to about 1 percent to 2 percent of total sales, not
enough to create a strategic disadvantage. However, the real competitive gains
these countries are forsaking come from the ability of shared services to
provide standard information across national boundaries and through the
entirety of a European business. Nowadays, this is almost a requirement to
operate successfully in the new European economy. Countries with laws that
restrict the ability to do this are putting businesses operating within their
boundaries at a distinct disadvantage.
Can we expect to see a single global center handling the bulk
of the administrative work for a giant American
Cecil: Union Carbide has a single global site for
the United States, Europe and Latin America, and other companies - including
Dow, American Express and Microsoft - have standardized processes globally,
though they havent consolidated them at a single site. Clearly, the
single global site has attractions. Having all transaction information
standardized worldwide at a single site makes it easier for management to make
strategic decisions. However, the same goal can be accomplished from multiple
sites, provided the information is standardized.
Williams: The idea
of a single global center for all administrative functions sounds like the
perfect answer, but such consolidation is impractical for most large companies.
The problem is one of optimum scale. It takes a minimum of about 100 people to
make a center worthwhile, and a company can keep benefiting from economies of
scale up to about 600 people. Past that point, increases in size tend to become
counterproductive as bureaucracy takes root. So a global center makes sense if
it isnt too big. If it grows too large, the solution is to simply build
another center. This multiple-center approach also avoids the difficulty of
retaining skilled staff with appropriate language skills to support operations
in remote time zones. Otherwise, staff members might be permanently working
outside normal local business hours.
What if a company is too small to build a shared services
Williams: Thats the case in most of Asia. It takes
considerable scale to justify establishing a shared services center, and most
companies fall far short of the minimum scale required. Yet some companies have
ignored this handicap and established centers anyway. In Australia and New
Zealand, there are a number of centers with 100 or fewer employees. To address
their scale problems, such centers have some options. They can invite other
companies to join them in joint ventures or consortiums, or they can market
their services to companies seeking to cut costs by outsourcing their
administrative transactions. Outsourcing is arousing considerable interest in
Australia and New Zealand.
Gregory: Some European companies are also
turning to joint ventures, consortiums and outsourcing. Shell and Ernst &
Young have formed a 50/50 joint venture called Tasco thats intended to
provide all the accounting for Shells downstream business in Europe.
Parts of British Petroleum (now BP Amoco), the BBC and some units of Unilever
have taken the outsourcing route.
Why not just outsource? Why go to the risk and expense of
developing a shared services center?
Cecil: Outsourcing offers a
tantalizing alternative to setting up a shared services center. Yet companies
that have taken that route warn that costs can prove higher than expected. Most
outsourcers demand that customers do transactions their way. If customers ask
for something non-standard, they pay a special charge. As one executive puts
it, They sell plain vanilla and make their money on special
charges. Some outsourcers promise to cut transaction costs sharply, say
by 30 percent, with the understanding that any savings beyond 30 percent will
be retained by them. Under such an agreement, if the companys transaction
costs are cut 90 percent, the outsourcer gets two-thirds of the savings. Of
course, companies can re-negotiate agreements.
consideration is whether companies are willing to risk the value of the
information inherent in their processes by letting someone else control them.
Are the cost savings worth it? Perhaps for a smaller company, but probably not
for a larger one.
What about small companies? Wouldnt outsourcing help
Williams: Outsourcing might be the only practical way for
smaller companies to take advantage of shared services. Also, as more
accounting firms, banks and other entities begin offering outsourcing services,
competition should drive down the costs and force providers to share more of
Whats the next big development in shared
Cecil: When it comes to processing transactions, many
companies agree the ultimate goal is to make them disappear. They see this as
the next great step in transaction processing, and call the approach the
distributed or virtual model. In it, business processes are designed so
administrative work is performed as part of another business process. An
example is the pay-on-receipt idea, in which the price to be paid to the
supplier is based on the quantity of goods received and the pricing in a
central database. While goods are logged into the computer as received, the
whole accounts-payable process is taken care of automatically. With this model,
administrative transactions are distributed throughout the company
and built into other processes. Standard transactions are handled
automatically. Only exceptions are dealt with by the staff.
Gunn Partners recently completed a research project that analyzes
shared services among 50 centers for 35 large international organizations on
four continents. For more information on the global shared services research
project, contact Mike Hostetler, project leader, at
or visit www.gunnpartners.com.