When does a win-win outsourcing relationship become a win-win-win outsourcing relationship?† Answer: when buyers outsource a process to a shared services center. So says Robert Brown, a senior analyst, Outsourcing Services, Europe, for Gartner DataQuest.
A shared services center typically begins as a joint venture between a supplier and a single customer, like the fulfillment center PricewaterhouseCoopers (PwC) built in Krakow, Poland. These two parties bear all the initial risks of constructing, establishing and operating the facility.
Once the center becomes successful, the partners try to woo other clients. As more companies participate in the center, costs plummet for everyone by achieving economies of scale through sharing resources.
Brown, who is based in London, England, observes shared services centers in Europe have revolved around a singe outsourced process. Finance and accounting has been the pioneer process. Human resources (HR) has recently joined the roster.
Finance and accounting has the perfect parameters for shared services outsourcing. It's critical but non core. "It's really boring," so companies don't mind handing over the drudgery of number crunching to an outsourcing provider. What's more, there are universally accepted accounting rules. There is very little controversy about how to update a general ledger.
Cut and Dried Processes Work Best
HR is similar. The basic processes are "cut and dried. There are not too many ways to get creative about benefits," says Brown.
When vendors announce they "have refined a process to its most efficient point," it is a siren call for buyers, Brown reports. Buyers also consider outsourcing finance and accounting or HR to a shared services center a low risk.
On the other hand, companies are much more reticent to outsource their customer care to an outsider. "For many companies, customer care is a serious differentiator," observes Brown. In addition, there are many ways to coddle a customer. This variety makes outsourcing more difficult.
Shared services centers are also taking a crack at vertical markets. Oil and gas has become a successful vertical market for shared services centers in Europe. Andersen Consulting started a shared services center with BP Amoco for its North Sea oil operations, outsourcing the finance and accounting function. Now some of the largest oil and gas companies are also outsourcing their finance and accounting operations to the center.
Andersen Consulting employees are based on the oil rigs, monitoring the oil drilling operations. Their colleagues are visiting the gas stations, examining receipts at the pump. Brown says these companies have refined 65 pence per barrel from the price of petroleum thanks to the cost savings produced through the shared services center.
The shared services center is also attractive to companies with operations in more than one European country. Each nation has distinctive HR and tax rules, which Brown labels "cross border issues." The creation of the European Union is accelerating European standardization, which is a boon to shared services centers. Now companies can centralize their HR in a shared services center, streamlining the process.
UK a Beachhead for Shared Services Centers
The United Kingdom has become the beach head for shared services centers in Europe. Brown says the "British don't care how their fulfillment is happening as long as it's cheap." The Benelux countries operate the second largest market in Europe for financial services outsourcing.
However, the French and Germans have opted for a different approach. They require their outsourcing vendors to make a business investment within their borders.
Brown says most of the buyers of pan-European shared services are "global multi-national customers who don't have a national bias." For example, Nortel Networks has partnered with PwC to outsource some of its European processes in four or five locations. Nortel has selected a decentralized approach for a multi-process outsourcing arrangement.
Brown says these large BPO buyers prefer to deal with more than one provider. For example, BP Amico works with both Andersen Consulting and PwC in the U.S. These buyers select the biggest BPO providers and "pit them against each other," he observes.
Lessons from the Outsourcing Primer:
- Shared services centers produce significant cost savings because of the economies of scale.
- "Boring" processes like finance and accounting or human resources work best in shared services centers because there are set ways of doing things. Customer care rarely works in these settings.
- The European Union is accelerating the growth of shared services centers because of the centralization of business laws.
- The UK is the leading BPO activity in Europe.