July 2005
Companies across the region are facing an increasingly competitive marketplace, with greater pressures on the bottom line and a more demanding customer base. Ibrahim El Husseini and Raed Kombargi from Booz Allen Hamilton report

Adopting shared services in current operating models is a journey that promises savings of up to 40% on the total cost of support functions. But as in any major transformation, it requires a high degree of leadership and senior management sponsorship, a systematic and comprehensive approach, and a good deal of change management.

The birth of shared services: getting full value from support functions

The 1980s were the heyday of corporate decentralisation. Anxious to dismantle top-heavy headquarters, large companies rushed to farm out vital services such as human resources, finance, procurement, and IT to stand-alone business units, which were the profit centers. In the name of accountability, the autonomous business units replaced the all-powerful headquarters. As a result of this fragmentation, standardisation was no longer attainable and economies of scale were lost. In the mid-1990s, recognising these shortfalls, companies began to reverse this trend of excess decentralisation. However, returning to command and control centralisation was neither attractive nor feasible. The challenge became to combine scale with superior service/customisation, at a price and quality competitive with what the marketplace offered. A new approach known as Shared Services was born.

What is Shared Services?

Shared Services is a new model for delivering corporate support by combining and consolidating services from headquarters and business units into a distinct, market-efficient entity that is able to compete with outside vendors. Internal customers can specify their needs, while providers must meet the requirements and expect evaluations on their performance. The Shared Services organisation becomes then another business unit, perceived and managed as an outside vendor working closely with its customers: the corporate core and profit center business units. Shared Services is the third leg of a new operating model, the first one being a lean corporate core focusing on policy and governance and the second one being business units focusing on growth and profits.

Why Shared Services is so appealing

In applying Shared Services, processes are standardised and redundancies are minimised without re-inflating corporate center headcount. Service levels are tailored to actual business unit needs, and operating budgets are based on customer demand. This translates into significant cost savings. In addition, Shared Services frees business units to focus on inventing, making and selling products or services, and often enables the building of critical capabilities in highly specialised service centers. Properly implemented, Shared Services combines the best of both worlds - the centralised model whereby economies of scale and centers of excellence are achieved and the decentralised model where service delivery is optimally managed through arms-length contracts with customers such as Service Level Agreements.

In-house versus outsource

Shared Services initially developed in 'asset carrying' companies in the manufacturing, oil and gas, power and telecommunications industries. These were among the first to organise into business units as a prelude to their breakup due to deregulation trends and buy-out activities. Executives from asset carrying companies often opted to set up Shared Services internally to maintain control. Service companies such as banks, insurance companies, and healthcare providers went in the opposite direction and outsourced as many support functions as possible. No extended internal Shared Services organisation was necessary but only a skeleton outfit that relied on the outside market.

Shared services in the Middle East

Companies in the Middle East have been very active on the Shared Services front and are catching up with companies in more mature markets. More often, Shared Services goes hand in hand with a major company-wide Enterprise Resource Planning (ERP) effort. "While designing for an ERP SAP system, we realised that we also should plan for Shared Services to reap the maximum benefits from the transformation," explains Mansour Al Kharboush, Vice President Shared Services and SAP Implementation Executive at SABIC. ERP systems enable Shared Services by allowing standardisation of activities, streamlining of processes and achieving scale efficiency gains. "Doing one without the other will not deliver the full potential of benefits and will subject the organisation to frequent unnecessary change initiatives," adds Al Kharboush.

Historically, procurement functions were among the first to be centralised, especially as benefits often are more tangible to management and quicker to realise. Despite the obvious merits, tension often builds up at the onset of most consolidation efforts. "Changing the mindset and operating practice from a centralised corporate buying approach to a customer oriented procurement service organisation is challenging. However, once the shift occurs within the organisation, benefits promised by Shared Services can be achieved in a very short time," says Ahmed Al Gatai, Shared Services implementation project manager at SABIC.

After some initial learning, the current Shared Services drive among Middle East companies is becoming increasingly customer focused and typically includes other functions such as Accounting, HR, IT and General Services.

With an eye to joining the WTO and a determination to operate more efficiently, Saudi companies are leading the way in Shared Services as they become more focused on competitiveness and cost cutting. Companies in other Middle East countries such as the UAE are following suit, leveraging the country's emerging position as a hub for call  and training centers for large international companies. Local companies in those countries have been quick to learn. However, despite the emergence of these service centers, the market for outsourcing support functions to independent providers remains extremely underdeveloped in the region. As such, almost all Middle East companies engaged in Shared Services have set up their own internal Shared Services organisations to fulfill their support function needs. The next generation in Shared Services in the region will focus on outsourcing and spinning off internal Shared Services organisations to provide services to external customers as well.

There are many benefits to Shared Services, and savings could reach up to 40% on the total cost of support functions.  Manpower rationalisation (60-70% of total savings) and business benefits such as process efficiencies and improved purchasing power (30-40% of total savings) are the two major sources. However, barriers to the full realisation of these savings typically revolve around the following factors:

- Resistance to change: companies in the region are slower to accept and implement change, which lengthens transition periods and delays savings realisation.

- Loss of control: Shared Services customers - both the corporate core as well as strategic business units - often resist the loss of control over support functions, especially in the absence of a proven track record from the newly established Shared Services organisation.

- Redundancies: it is more difficult to rationalise redundant resources in the region than in developed countries due to socio-economic and cultural constraints.

- Data availability: in the absence of historical data as a starting point for comparisons, measuring Shared Services benefits could prove to be very challenging for Middle East companies.

In order to overcome these barriers, a clear and comprehensive 'business case' must be developed transparently to lay out the economic benefits of migrating to Shared Services. This case - organised by customer and by functional area - is crucial to ensuring leadership acceptance, securing agreement on service levels and budgets, and providing a starting point for future performance measurement.

Capturing the promise of shared services

Companies that successfully managed the move to a Shared Services model followed a number of principles and best practices.  On process, the key success factors include ensuring CEO and senior management level commitment to drive the effort, setting aggressive goals and sticking to them, and communicating frequently to staff. On content, the right selection of services and the use of a transparent framework are crucial. Service Level Agreements drawn between business units (customers) and the Shared Services organisation (providers) are essential. These can vary from a concise one page document to an elaborate full-fledged agreement. The key is to have them as specific as possible regarding services offered, payment terms and accountabilities. Finally, agreeing on Key Performance Indicators (KPIs) with specific targets and on the Shared Services Governance, such as a Board and Users Councils composition and decision rights/approvals mechanisms, also is fundamental.

Every transformation requires a well thought out implementation plan to see it through. Shared Services transformations are no different, especially as they affect the entire organisation. Companies that understand these implications are the ones that ultimately reap the benefits. It is all about changing the way you do business, and that takes time and commitment across all levels of an organisation.

© Banker Middle East 2005