Shared services centers produced big savings in the past, but now they big effects are gone and they have become a cost. A radical change in their business model can allow them to transform their expertise in process optimization into radical efficiency innovation. Only that way they can avoid their concentration in huge accounting factories in Asia.
When at the end of the 90s and the beginning of the 2000 decade powerful ERP systems, such as SAP allowed the optimization of organizational and administrative processes, many big companies created shared services centers in order to achieve savings. In few words, with the same resources and staff they served one national or regional branch, they could provide services to branches in 15 to 30 countries or more.
Results were truly outstanding. After an initial investment, companies found themselves with savings of 30% to 50%. I used to work for the Mercedes-Benz shared service center in Spain and the administrative cost per vehicle was reduce in a percentage I am not allowed to reveal, but it had two digits.
Limits to savings
Once the big effects are left behind, corporations and clients quickly get used to the current cost level and start to demand more savings, more productivity, more growth. We had an intuition at Mercedes taht this is something that can only be achieved with innovation, but low cost work ideology prevented the company to perceive process innovation as a key competitive advantage.
For instance, in 2005 we started to see how India and other Asian countries could do the same work for a fraction of the cost. When the mother company wanted to close the SAP programming area of the shared services center, with a small employee driven innovation project, programmers found 40 alternatives for adding value and, in fact, the area transformed itself into a successful high level consultancy for the whole corporation.
Shared services centers have accumulated a huge amount of knowledge on process optimization and technologies that is applicable to all corporate areas. A research done among 588 shared services managers (HFS Report 2010) showed that they are conscious that innovation is the key success factor. They are also conscious that they cannot deliver savings just with traditional process reengineering and traditional continuous improvement and that they have to introduce radical innovation. But they do not know how to innovate.
Continuous improvement is not enough
I witnessed several attempts to introduce “continuous improvement programs”, idea generation procedures or collaborative idea generation platforms –very trendy! A sort of innocent argumentation affirmed that by linking improvements and savings to variable salary.
The truth is that those platforms and programs that have not failed because they did not manage to get from idea to implementation (how, if almost no middle manager wants to liberate employees for “unproductive” work) have offered certainly modest economic results: shut lights earlier down, change a bit this and that process, automate a bit incidences management … normal improvements not linked to corporate strategy are against innovation management basics.
Innovating the shared service business model
Two options seem interesting for those European shared services centers that do not want to close and concentrate their work in a big factory in China, the Philippines or Vietnam: radical innovation on their business model and open process labs as centers for radical innovation in business processes.
The classical business model of shared services is based on achieving savings and efficiencies by creating economies of scale to many clients without increasing resources (while those resources are shut down in the client organization). Key to success is strong process automation by the means of technology and to keep a very tight staff for incidence management of very standardized processes. This staff –usually young, paid with low salaries and with a high rotation- works according to the classical industrial model based on chain assembly; called now “organization by processes”. This way, qualified works (financial, IT, human resources, etc.) get massified, price for work lowers and it is possible to hire cheaper workforce. Nevertheless, since process standardization is a key success factor, a force of more qualified process experts belong to the staff and thanks to their work many workers develop this key competence.
This model, as already discussed, is not enough any longer. A radical change in the business model means a change in the value proposition. From “save by scale” to “save by radical process innovation”. It is not about administrative process improvement: it is about bringing innovation to commercial processes –where the money is done: often bureaucratized and with many human resources dedicated to sales administration, but that do not sell and has almost no contact, or at least productive contact, with the customers. Addressing this target means going from offering shared services to offering directly efficieny
Classical controlling distinguishes between profit center and cost center. With the new value proposition a new category should be created: the efficiency center. Therefore, for internal marketing reasons shared services centers should position themselves within the corporation as efficiency centers.
The second change in the business model is about the customer and the segment shared services target: it is still the corporation, but no longer the CFO, but the chief sales officer.
The third business model innovation is about the product: knowledge is sold, not services; knowledge on how to achieve efficiency in the whole organization.
The forth change addresses organizational relations. Currently it is based on the classical industrial customer-provider relationship: “you deliver and I squeeze you”. More interesting is the Toyota model: “yes, I squeeze you, but less because you assume an important part of the innovation cost and I keep the proprietorship.”
The central innovation at a business model lies in the revenue streams. Until now, shared services are financed by the savings they achieve. As they do not achieve those effects –at least I the radical way they used to do- they have become a cost factor. If they focus on innovation, they can obtain funding again with their results, they can train third parties, develop technology and methods in order to sell them, etc.
The process lab – the heart of innovation for efficiency
Traditionally innovation has been part of the R&D departments. The open innovation approach is breaking this practice, a trend the benefits shared services centers, where –as seen- many employees own important knowledge and experience on optimization and improvement and can act as innovation workforce in an employee driven way.
A living lab means creating innovation in real environments with real users and real clients (open innovation). There are technology living labs (MIT), commercial living labs (BMW), social living labs (Citilab) and mixed living labs. A shared services center offers the unique opportunity to work in a physical and also in a virtual space for commercial innovation (sales), administrative innovation (back office) and social innovation (human resources, organization). The goal is to bring to work together the optimization and standardization expertise of the shared services centers with the rest of the corporate areas and test those innovations in real environments.
The benefit for the corporation
The benefit for the shared services organization is clear. What about the corporation? Many companies have already internal consulting services and for sure divisions develop continuous improvement as part of their daily operations. Why bother into investing in innovation centers? For efficiency!
What the corporation gets is an innovation center for efficiency: the opportunity of systematic work on cost reduction and a body of knowledge and experience on savings for many corporate areas, but at the cost of shared services. The innovation approach, rather than continuous improvement or process optimization ensures at least an interesting percentage of radical cost cuttings.
Internal consulting, as long as it is not strategic consulting, should be a part of global shared services, ensuring that it is really used, not as a luxury, but as an efficiency driver.
Competences to be developed
Although owing an administrative profile, shared services workers already own on their DNA the seed for innovation because they have already spent much time optimizing processes and information systems. They are de facto consultants .
A shared services center that wants to become an efficiency innovation center needs to reinforce the existing know how with following competences: innovation competencies, user work and user innovation methodologies, innovation teams, innovation processes, specific project management, technology scouting, etc.
Rather than buying in trainings, a suggestion would be to get the training by the change process itself that transforms the shared services center into an efficiency innovation center.