Shared Services: A Business Strategy For Increasing Shareholder Value - Site Selection Magazine

From Site Selection magazine, July 2000

M A N A G E M E N T S T R A T E G Y

Shared Services: A Business Strategy
For Increasing Shareholder Value

b y W I L L I A M T . W H I T E H E A D

Shared services centers represent a highly effective way to streamline business processes, reduce headcount and real estate usage and improve shareholder value.

An increasing number of companies are turning to the concept of "shared services" to lower operating expenses and gain competitive advantage. Briefly defined, shared services consolidates accounting, human resources (HR), real estate and other transactional operations to reduce costs and increase customer satisfaction. As a management technique, shared services falls into the process-oriented family of management approaches, placing it along side such well known strategies as total quality management and business process reengineering.

Although it is estimated that upwards of 60 percent of the Fortune 500 have already moved to the shared services environment--and many more will do so in the future--knowledge of shared services is not widespread. This article provides insight into the shared services concept, key facility characteristics, and the factors influencing the location of shared services operations.

Why Shared Services?

In today's increasingly competitive environment, corporate leaders are under constant pressure to add value to their companies by streamlining processes that are not central to company operations and concentrating on strategic, or core, processes. Moreover, top executives often manage duplicative staff and support processes across multiple business units. In a shared services environment, activities that support core business processes are pulled out of each business unit and consolidated into a separate operating unit that in turn runs these supporting processes as its core function.

Companies benefiting most from shared services operations are larger and more complex organizations--generally those with annual revenue of US$1 billion dollars or more and multiple business units. While the size of shared services operations differs widely, with some as large as 1,000 or more employees, they typically employ 150 to 300 staff located in office space ranging in size from 30,000 to 50,000 sq. ft. (2,800 to 4,600 sq. m.).

Support services that are most often carved out of individual business units and put into the shared services organization are elements of finance, accounting, human resources, and information systems. Some common types of shared services centers include:

Financial shared services centers: These frequently include accounts payable, accounts receivable, general ledger, travel and entertainment expense, purchasing, and other financial and accounting activities.

Human resources shared services centers: These commonly include payroll, compensation and fringe benefits, and general human resources administration.

Information technology shared services centers: Typically included in these centers are computer help-desk functions, vendor-relations management, and overall IT administration.

Hybrid shared services centers: These may combine elements of financial, human resources, and IT shared services as well as other corporate support activities, such as real estate facility management and legal services.

While shared services centers are often confused with call centers, they are quite distinct from each other. The confusion may result from the fact that some shared services centers use call centers as a part of their enabling technology. This is commonly seen in shared services centers handling employee payroll and benefits, credit and collections, and other aspects of internal and external customer care, such as computer help desks. Shared services centers that use call center technology also frequently employ sophisticated Internet, video, and data links to provide improved service.

Benefits of the Shared Services Approach

Consolidating accounting, HR, and other corporate support activities into a shared services operation has numerous benefits, including lower operating costs, better customer service, more focus on continuous process improvement and opportunities to leverage technology investments. Companies can gain up to a 30 percent or more reduction in staff as a result of economies of scale achieved through shared services. In addition, a comparable reduction in office space often accompanies the headcount reduction. Resulting cost savings can be substantial. In terms of improved quality and customer service, combining processes across different business units allows easier standardization of activities and quicker adoption of best practices. In addition, employees of the new shared services center typically have more opportunities for advancement than they would in the individual business units. As a result, employee turnover is lower, which can also lead to better quality service.

By bundling support processes into a separate organization, managers of the shared services operation can focus on these processes and activities as the core of their own operating unit. Greater attention can thus be directed toward performance measurements and benchmarking to assure continual process improvement.

Finally, moving to a shared services environment frequently provides the economy of scale needed to invest in sophisticated software systems to streamline and improve business processes. Enterprise resource planning (ERP) software such as those systems marketed by SAP, PeopleSoft and Oracle, allows implementation of a comprehensive, integrated approach and facilitates information sharing between the shared services operation and individual business units.

Shared Services

Stay or Go?

While consideration is usually given to locating the new shared services organization in existing facilities operated by one of the business units, there are often compelling reasons for establishing the organization in a new location. A major reason is the opportunity to establish the operation in a new community where labor, real estate and other key operating costs are lower.

Of course, annual operating cost savings offered by the new community must be evaluated against the one-time costs required to achieve the ongoing savings. Typically, a two- to three-year payback is required to justify the expenses associated with employee relocation, employee severance, new employee recruiting and training and other costs frequently associated with facility relocation.

Aside from costs, a new location may also provide other intangible benefits. These include the ability to establish the new organization independent of existing business units, the ability to create a separate identity and corporate culture for the new shared services operation and the opportunity to implement a new compensation structure for shared services employees.

Key Location Criteria

Due to the high level of skills required by shared services, availability of qualified employees is a key factor when evaluating location alternatives. Forty percent or more of shared services center employment is comprised of managers and professionals possessing college and advanced degrees in accounting, business administration, computer science, finance, and related fields. In addition, many exempt-level employees must have significant prior work experience. Depending on the specific function of the service center, this may include corporate accounting and finance, compensation and benefits, or IT experience.

Nonexempt employees must be bright, knowledgeable of PC and computer spreadsheet operations, and able to communicate effectively with internal and external clients. Education requirements are a minimum of a high school diploma, with a strong preference for some college experience. In some shared services operations, even nonexempt employees may be required to have a four-year college degree.

Eight straight years of unprecedented economic growth have put increasing pressure on labor markets across the country. In assessing labor availability, it is important to consider key labor-supply measures such as community size, population growth trends, commuting patterns, labor-force participation rates, and increasingly the presence of multi-lingual employees. Education and occupational data must also be analyzed carefully, because they contribute greatly to labor availability as well. Depending on the specific function performed by the shared services center, key labor-supply indicators can include the number of four-year college graduates, the number of employees in the FIRE (finance, insurance and real estate) sector, and the percent of the work force employed in clerical and professional/technical occupations. The presence of area universities offering degree programs in finance, accounting, business administration, and computer science is also important, both as a source of new hires and for employee continuing education.

Given the mandate to reduce operating costs as part of shared services, careful consideration must be given to labor costs during the community evaluation process. Salary costs for entry-level professional accountants, mid-level managers, and clerical employees can vary as much as 15 to 20 percent from location to location, so it is essential to evaluate cost differentials. Attention should also be paid to assessing the impact that labor turnover rates have on the "hidden" costs associated with employee attrition. These costs include employee recruiting expenses, training costs, and productivity losses, which can have a substantial impact on overall labor costs.

Quality-of-life considerations also come into play in the community evaluation process. Area living conditions are important to attract key transferees from existing business units and to attract and retain the shared services center's highly educated work force. Housing availability and cost, quality of public education, climate, and recreational and cultural opportunities are all important in assessing area quality of life.

Other location factors that can have a bearing on the site selection decision include the following:

Availability and cost of existing office space. Communities with existing office space have a distinct advantage in the site selection process over locations where only greenfield site opportunities are available. Class B office space is frequently considered most desirable in terms of balancing the need for attractive space to enhance employee recruitment with the need to minimize real estate costs.
Natural disaster risk. The potential for disruption due to earthquake, hurricane, tornado, and other natural disasters is frequently evaluated as part of the site selection process since any interruption in shared services operations can affect vital customer service, accounting, HR, and other support services. While the risk of disruption due to natural disaster can never be eliminated, it can be reduced through the location selection process.
Passenger air service. Frequent and reliable air service is essential for many shared services centers in order to maintain close communications with select entities such as corporate headquarters and business unit headquarters.

Recent Location Trends

In reviewing locations considered for recent shared services projects in the USA and Europe, it is clear that mid-sized metropolitan areas are coming under increasing consideration for these operations. While major metropolitan areas like Chicago, Dallas and London are still on the list, mid-sized alternatives are frequently able to provide a qualified and educated workforce at a competitive cost level, along with an attractive quality of life, the availability of existing office space and strong passenger air service.

Recent location projects conducted by PricewaterhouseCoopers have given close consideration to such communities as Charlotte, N.C.; Nashville, Tenn.; Tampa, Fla.; San Antonio, Texas; Phoenix, Ariz.; Las Vegas, Nev.; Boise, Idaho; and Denver, Colo.; among others. This same trend is seen in recent European shared services projects, with cities such as Manchester, Leeds, Glasgow, Edinburgh and Cardiff in the United Kingdom and Maastricht and Eindhoven in the Netherlands coming under active consideration. Depending on the specific location requirements of the shared services center, it is likely that mid-sized communities in the US and Europe--as well as Latin America and Asia--will continue to offer significant advantages for these operations. Site Selection

-- William T. Whitehead is a senior manager in the Business Location Strategies
practice at PricewaterhouseCoopers. He is based in Chicago.