The Pros and Cons of Shared Services | Article

umbrellaOften, people new to outsourcing confuse BPO with shared services outsourcing. The two are quite similar except for one big difference: Shared services outsourcing allows a company to outsource a function and keep its eye on its core mission while still keeping this function under its corporate umbrella.

Shared services outsourcing happens when a company creates a conglomerate or holding company and then creates a separate entity to perform a specific contextual or non-core process. These corporations chose to operate this way because they want to have their entire focus on their core business and not be distracted by necessary but contextual issues. Still, they feel uncomfortable outsourcing this function to a third party. So they create a shared services center.

The petrochemical industry has been one of the leaders in shared services outsourcing. Shell and Texaco, for example, have separate corporate entities that provide back office functions for data processing, real estate management, and finance and accounting. Shared services build economies of scale and leverage operational efficiencies around basic, non-controversial services.

These companies behave and act in the same way as a BPO outsourcer, operating very much like Arthur Andersen (AA) or PricewaterhouseCoopers (PwC). Often, BPO outsourcers like AA or PwC help these companies establish their shared services centers or form joint ventures with them to do this.

Shared Services Hybrid for North Sea Oil

BP Amoco created an interesting hybrid by forming a joint venture with a large BPO provider. The oil and gas company, the third largest in the world, joined hands with Andersen Consulting to build a BPO operations center in Europe. The original impetus was to help the oil and gas company handle its financial and accounting functions for its North Sea oil rigs.

Both firms shared the capital costs and the risks of building this center. They also established the modus operandi for the BPO outsourcing. Andersen Consulting employees monitor all aspects of the exploration, refining and marketing operation. For example, Andersen employees are based on the oil rigs, monitoring the oil drilling operations. Their colleagues are visiting the gas stations, examining receipts at the pump. Robert Brown, an senior analyst with GartnerDataQuest in London, says this outsourcing alliance has refined 65 pence per barrel from the price of petroleum thanks to the cost savings produced through the shared services center. He discusses the benefits of this hybrid BPO arrangement in this issue.

Once the two partners have honed the process, they begin to market their BPO offering to others. Some of the largest oil and gas companies are now outsourcing their finance and accounting operations to this center, Brown reports. The partners have used this BPO center as a springboard to grow the center’s volume globally.

In contrast, PwC has decided to go it alone in a pure BPO play. The firm has been successful in establishing global centers, like the fulfillment center it built in Krakow, Poland. PwC selects sites where there is an educated, talented workforce that is available at lower labor rates than typical U.S. urban centers. PwC retains full accountability for the results in this BPO overseas operation.

From my observation, shared services centers can be painful to put together. Sometimes they are hard to sustain unless the outsourcing mission is very, very clear. Like all outsourcing ventures, they must have access to top flight talent.

Trouble Attracting Top Talent

Talent is one of the reasons shared services outsourcing rarely works well. In reality, they are just a cost center for the corporate sponsor. This kind of environment doesn’t spawn great challenges, a prerequisite for top producers.

BPO outsource providers, on the other hand, have the ability to recruit the stars because they feel they can make a difference in work they like. Also, the BPO vendor can compensate them through equity in the company. Attracting and retaining this type of talent over time results in better quality products and services for the provider’s customers. This, in turn, yields lower costs, another buyer benefit.

In addition, shared services centers suffer from lack of outside capital. The revenue they generate goes back to the mother ship. Therefore, they must find the resources to continually improve their process.

BPO outsource providers, on the other hand, generate their own revenue streams. They can use this cash to update and add offerings.

When are shared services centers a good idea? I believe only when a company does not want to outsource a specific process to a third party. They are also valuable overseas, especially when the service includes divisions that do business in many countries. The shared services center becomes the expert in the different governmental rules.

Companies who form shared services centers, however, must understand they are inherently unstable because they have a tendency to become bureaucratic. This can create friction with the sister company.

And their success is by no means guaranteed. The big companies who are their clients like to pit one against the other and then work with both.

Lessons from the Outsourcing Primer:

  • Shared services companies make sense when a corporation does not want to hand over a contextual process to a third party.
  • Pure BPO providers can attract the best talent and can improve their services from their own revenues.
  • BP Amoco and Andersen Consulting created a hybrid by creating a joint venture to build a BPO operations center for North Sea oil finance and accounting.

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