[HROA Essentials] Negotiating the shared services minefield

Moving to shared services has proved an increasingly popular model for HR departments looking to improve efficiency and reduce costs, but effective use of shared services requires careful planning. Angus Kidman identifies some of the key issues to consider.
 
At first glance, the HR department looks an obvious candidate for a shared services approach, since it provides a natural match to many of the key attractions of farming out entire administrative tasks to an external organization. "Benefits result from aggregated economies of scale or scope, the ability to negotiate from a stronger aggregate base and through adoption of streamlined, common business processes, particularly when significant simplification and standardization are involved," says Gartner analyst Richard Harris.

Shared services also become more attractive in a rapidly changing corporate environment. "Employee populations are growing increasingly complex due to multiple mergers, geographic distribution and swings in employment cycles," notes HR analyst firm Best Practices.

IES Research Networks has identified three principal drivers for moving to a shared services approach: reducing costs, improving quality and effectively handling organizational change. All of these can provide a sensible motivation for considering a switch to shared services. However, years of experience suggest that shared services can frequently be problematic if not approached with caution. If you're considering a move to shared services, be sure to consider these issues.

Make sure you gain cooperation from the IT department. External access to HR resources, whether in a shared services model or a fully outsourced arrangement, will be critically dependent on technology for service delivery. Technology isn't the be-all and end-all of any shared service arrangement, but without an effective technology bedrock, service delivery is extremely likely to be compromised.

Ensuring this doesn't happen requires cooperation. As Best Practices points out: "Outsourcing efforts by large companies commonly encounter resistance from operational areas that control core HR data systems and processes. Technology still plays a critical role in determining outsourcing possibilities."

One key role that IT plays, which will ultimately benefit all participants, is simplifying existing infrastructures. According to studies by Hackett, companies that don't attempt to reduce IT complexity spend 18 per cent more on HR services per employee. "The bottom line is simple: our empirical research shows that companies which embrace IT complexity reduction as a mission spend less across virtually every area of the back office," says Hackett IT practice leader David Hebert.

When you do gain co-operation from the IT team, make sure you work jointly to plan and deliver the most relevant services. Even amongst companies with shared services arrangements, Deloitte's 2005 Global Shared Services Survey found just 44 per cent offered employee self-service - one of the most basic of HR technology applications. Such obvious gaps can be avoided with careful and considered planning.

Don't rely on contracts alone. While a well-defined contract is an essential requirement for any shared services arrangement, especially once which relies wholly on external suppliers, excessive dependence on the contract as an enforcement mechanism and relationship definer is likely to result in a culture of mistrust between the main company and its HR supplier. "The formal contract is an important foundation, but its benefit lies in setting the tone of the supplier/customer relationship, and developing a culture and understanding of mutuality," say Gartner analysts Cathy Tornbohm and Claudio Da Rold in a recent commentary. And while it can be tempting to consider short-term contracts to maximize flexibility, the best financial options usually come from longer-term arrangements.

Identify specific services that could benefit from being shared; some common HR tasks provide clearer ROI than others. One example is handling leave of absence, an increasingly common requirement for retaining staff in a competitive environment. According to Best Practices studies, companies that outsource more than half of their leave of absence activities can reduce cost per leave by an average of 30 per cent.

It's important to recognize that it's not a question of all-or-nothing, and that moving to shared services won't automatically allow you to make large-scale changes to the organizational culture. For instance, Deloitte's survey found that 62 per cent of employee compensation in organizations relying on shared services relied on traditional, formal bonus programs, even though many such businesses planned to use other, less formal measures such as improved career progression as a means of inspiring and retaining staff.

Don't assume you're too small. While scale benefits from shared services will help cut costs in large organizations, for small-to-medium businesses, sharing provides a different benefit: access to specialist skills. According to Deloitte growth solutions partner Jeremy Bolt: "Mid-market companies determined to stay focused on growth, and not be distracted with onerous compliance requirements, skill shortages and risk management, will increasingly turn to external providers to supply a broad range of functions and services. Identifying and developing an enduring relationship with a good external provider is very much a growth enabler for the mid market."

That conclusion is borne out by other data. In a 2004 US survey by the Bureau of National Affairs, gaining access to greater expertise was the top reason to use a shared provider, cited by 69 per cent of respondents.

Use shared services as a compliance enabler. New regulations such as Sarbanes-Oxley are impacting companies worldwide. The more tightly defined processes inherent in shared services arrangements can help make compliance with such financially orientated regulations easier. In one survey of 115 global companies by Deloitte, 80 per cent says that shared services arrangements simplified compliance, and 50 per cent say they reduced compliance costs.

As Deloitte noted in its survey: "Companies that find ways to make shared services work - addressing and overcoming the many people, process, and technology challenges that shared services can entail - are well placed to seize competitive advantage in today's global economy."

Key issues for HR shared services

Career progression

Quality processing

Maintaining customer focus

Retaining talented staff

Performance management

Recruiting skilled resources

Ongoing training

Morale

Rotation of staff

Source: Deloitte 2005 Global Shared Services Survey

by Angus Kidman
Click here to see Mr. Kidman's HR case study on Proctor & Gamble
Source: www.humanresourcesmagazine.com.au