IT Shared Services: Today and Into the Future

There are few truisms in Shared Services today, but one is clearly that technology is a critical tool to enabling effective and efficient back office management.

A confluence of forces has contributed to this fact: global networks have reduced the cost of communications to nearly zero; the internet has connected businesses by enabling companies to share processes and information more quickly and inexpensively; and, finally, current and emerging technologies have been leveraged to drive improved performance of back office functions.

Indeed, a recent A.T. Kearney – Harris Interactive study of major corporations found almost 80 percent of respondents believe that technology is either extremely or very important to the success of shared services. Additionally, nearly 75 percent of executives report that their technology has improved since implementing shared services. In fact, their functions are performing better than before they moved to shared services.

But in all this talk of IT as the enabler, rarely recognized is that the IT function itself has in fact spearheaded the drive toward and adoption of shared services. Look at most organizations today and it is the IT function that has adopted the fundamental concepts that underlie progressive shared services organizations – a strategic vision, chargebacks, service level agreements, performance metrics and guidelines, etc. IT has, without a doubt, been one of the most successful examples of shared services application.

A View of the Marketplace: Our Study Findings

Fundamentally, shared services is the centralized management of functional activities for multiple users within a company. In application, progressive shared services is more than mere centralization. It is about adopting a more professional perspective toward internal operations and operating in the vein of the external vendor, without necessarily becoming a stand alone entity.

From this perspective, IT – with adoption rates greater than 85 percent – has become one of the most popular support functions that companies have targeted for shared services adoption.

Globally, 70 percent of executives report their shared services as either successful or extremely successful – regionally, this translates to 75 percent in North America and 63 percent in Europe. This discrepancy occurs primarily because European executives face greater structural considerations – such as regulatory variations, and social, cultural and linguistic differences – than their American counterparts when implementing shared services. Partly as a result of this, European leaders also have more realistic expectations about the promise of shared services for their own organizations.

IT – with adoption rates greater than 85 percent – has become one of the most popular support functions that companies have targeted for shared services adoption.

Despite the challenges, many global corporations are moving aggressively toward the shared services model. According to our study, companies, on average, share the services of nearly six departments, and most are willing to invest the time and money necessary to make a complete transformation. In addition, companies are implementing shared services with increasing levels of sophistication. Indeed, many use service level agreements and charge-back systems, and either have or are considering outsourcing and offshoring strategies as a key part of their operations.

Within the IT space, in particular, the benefits have been significant. The average cost reduction since implementing shared services has been 15 percent, while headcount has dropped 14 percent. Further, nearly one third experienced cost reductions of 15 percent or greater.

Looking behind these figures, internal productivity improvement was the primary benefit of moving IT to shared services (74 percent of respondents); improved collaboration and teamwork across shared services personnel was second and improved functional performance and internal client satisfaction were third and fourth, respectively.

These findings are telling. While still respectable, the rank order above does suggest implicit priority setting on the part of senior executives as they implement IT change.

The continued implementation of IT shared services is having a dramatic impact on the CIO’s role.

Another trend is the relatively higher levels of dissatisfaction in Europe. European executives were more likely to have experienced a worsening of performance – with almost a fifth experiencing this in both performance and internal client satisfaction. Our experience suggests this is likely the result of the complexity of implementation in Europe, as well as a lack of coordinated, carefully planned and rigorously monitored implementation.

In light of these findings, it is interesting that some IT (and other functional) executives still cling to the misconception that shared services will result in increased costs. Examples of companies that ‘tried’ shared services and abandoned the concept because of higher expenditures or operational complexity are plentiful. But in almost all cases, the problems these companies faced could have been managed through better vision, design or implementation.

Steering Clear of Common Pitfalls

Shared IT services makes sound economic sense. But to be successful, IT organizations must think strategically, constantly listen to their “customers”, consistently measure results, and avoid several common pitfalls:

• Decentralized IT. To get the most out of shared services, leading companies not only centralize and standardize, they make doing so a top priority. Except in select, defined cases, there is little reason to maintain decentralized, unique IT operations across a company.
• Lack of customer focus. Companies must avoid a push mentality with regards to IT service levels. Work with the internal customer to define improvements, adopt written commitments that are not detailed contractual agreements. Such simple commitments instill accountability and increase credibility, as well as applicability.
• Inability to prioritize IT projects. If there are no clearly defined mechanisms to measure IT effectiveness, a lack of performance criteria, and no discipline in executing to the criteria, companies can get off track and focus too much on inconsequential issues. The result? Whoever shouts the loudest, gets the most attention.
• Lack of discipline in executing IT investments. Many executives underestimate the cost of technology needed to implement shared services. Survey participants indicated that, typically, they ended up spending more than twice what they originally expected – fundamentally the result of either scoping or design issues at the outset, or undisciplined implementation.
• Lack of adoption of external market solutions. While the research shows this as a positive trend, too many companies still will not adopt external solutions due to perceived concerns around quality and service levels. Whether it is discrete offshoring or full scale outsourcing, the market has developed to the point where even the industry giants, such as GE, incorporate this as part of their strategy.
• Limited performance transparency. The ability to demonstrate the value-for-cost tradeoff through performance metrics is paramount but missing in many corporations. A key issue is the lack of identifiable metrics as well as key enablers – for example, only 37 percent of chargeback systems are integrated with IT – suggesting a laborious, manual process to get the data.

Offshore and outsourcing trends

As companies fully integrate their back-office services, many are taking steps to outsource key activities to third-party service providers. Currently, 62 percent of executives say their companies are outsourcing services, with IT being one of the most popular functions. North America surpasses Europe in terms of adoption, mostly because the provider market in the U.S. has evolved faster.

While outsourcing has become popular and is currently receiving a lot of media attention, only 17 percent of executives in our survey say they expect to outsource more functions in the future. This is probably because they believe they have already tapped into all existing opportunities – at least to the extent where they are comfortable. In turn, this also suggests that executives may not be fully aware of the advances in the market. External providers are quickly acquiring new skills and capabilities.

Nearly 75 percent of executives report that their technology has improved since implementing shared services. In fact, their functions are performing better than before they moved to shared services.

Similarly, only 11 percent of respondents today consider offshoring to be a key strategy for shared services – although we fully expect this to change as the market evolves and the political and economic ramifications are better understood. In North America, IT is the most-preferred function that companies choose to send offshore, whereas European companies favor sending finance.

The Next Generation of IT Shared Services

The continued implementation of IT shared services is having a dramatic impact on the CIO’s role. Indeed, a shift is occurring as the confluence of forces discussed above change the CIO role – allowing him or her more time to focus on business strategy versus transactional management.

This evolution represents a step change for the role of the functional leader – a shift from focusing on routine transactions and “fire fights” to thinking in terms of strategic value. Although responsibilities for managing transaction-based activities will not disappear, CIOs and other executives are beginning to manage their functions as hybrid units. Eventually, they will become internal, client-facing consultants who provide strategic advice to senior management. At the same time, they will oversee and integrate a broad array of service delivery options, ranging from business process outsourcers to offshore solution providers (captive or otherwise) to internal service providers. The closest analogy would be today’s more progressive legal departments. Legal counsels are educated, well paid, trusted advisers to senior management, and operate departments that mix internal providers and external legal counsel.

As shared services organizations evolve, this shift to become more strategic will drive the underlying emphasis of change well into the future.

About the study

A.T. Kearney’s study on Shared Services, conducted by Harris Interactive in late 2003, included director-level (or equivalent) executives or higher at companies with US$1 billion or more in annual revenues. The companies spanned four major industry segments: automotive, consumer products, financial institutions, and transportation. The respondents have either deployed shared services within their company or helped develop shared services policies. In total, Harris Interactive interviewed 140 executives, with roughly half based in the United States and Canada, and half in the United Kingdom, Germany and France.