Contents

1.
1.1 Introduction
1.2 About Caerphilly – Current Situation
1.3 Opting for Shared Services

2.
2.1 Introduction
2.2 Infrastructure costs
2.3 People costs
2.4 Evaluated Cost Benefits
2.5 Fiscal Perils

3.
3.1 The Current Scenario
3.2 The proposed organization of the new service
3.3 Appraisal of options
3.4 Identified benefits of the proposed new arrangements
3.5 Identified risks of the proposed model
3.6 Conclusions

References
 Explain why Caerphilly are considering this model of service provision.

1.1 Introduction

As organizations advance, bureaucracy and administrative load rises up. But

administrative and support functions too often do not feel directly responsible for the company’s
results and tend to drift into a “comfortable mode” The back-office functions are commonly a
mean to change into flexible, responsive, effective, customer-oriented teams.

Shared Services, SAP whitepaper, prepared by SAP’s Business Solution Architects Group.

Shared Services refers to the arrangement of a service by one part of an organization

where that service had been found in more than one part of the organization first. Thus the
capitalizing and resourcing of the service is shared and the providing department effectively
becomes an internal service provider.

http://en.wikipedia.org/wiki/Shared_services

1.1 About Caerphilly – Current Situation

The Human Resources (HR), Training and Payroll service is currently provided by
around 96 full-time equivalent staff: 61 Administrators, 23 Professionals and 12 Managers. In
total, the annual cost of these services to Caerphilly Council is £4.8 million which includes
around £2.2 million spent on external providers of recruitment and training services. The purpose
of these services is to support the workforce of Caerphilly Council and the annual cost is £511
per council employee. It is worth noting at this stage that the Caerphilly HR cost per employee in
the CIPFA 2008 benchmarking survey is significantly lower than the average UK local authority
cost.

The HR staffs are committed to providing a good quality service. But administrative
processes and the degree of specialization among the professional staff is not as great as in larger
organizations.
 Local authorities, including Caerphilly, have sought to lessen the burden of cost of
central services. If this is attempted just by a continuing budget squeeze the effect would be
degradation in the service. When local authorities have rearranged their service internally
without any of the advantages of shared specializing and transactions they have taken a lot of
pain to maintain quality.

1.3 Opting for Shared Services

The reasons why Caerphilly is considering the shared service venture are as follows:

• There would be a different approach in the exercises that the company performs
and also in the execution of the activity performed by various sections of the organization.
For example the processes, like training and payroll processes (for Caerphilly are not the
major functions of the company) becomes the major responsibility for a shared services
organization.
• Quality improvement : because the focus of the employees in one sector also
accumulates competence. The methods which are often repeated are usually made better and up-
to-date resulting in decreasing mistakes and also deliver on or before time. Administering the
intricate activities, ascribing responsible employees, hence discarding faults by acquaintance and
easy methods. Therefore with a correct IT system support, The consolidation of all big and
important contact and operational data terminates redundancies and opens new doors for
analysis.

Martin Hammer, partner at PriceWaterhouseCoopers says “Companies . . . Need at least

$500 million in revenues to benefit from the economies of scale that shared services can
provide,”. Leading benchmarking and analyst firms have brought to light that about half of the
FORTUNE 500 companies have already put in shared services to work and so has Caerphilly.
The most regular processes put into a shared services at Caerphilly are (in order of priority)
financial affairs, human resources, and information technology (IT). This organization has a high
trade volume and touches the highest degree of standardization “75% of the companies using
shared services organizations have deployed accounts payable (AP) and accounts receivable
(AR) processes” which benefits Caerphilly it also proves as an advantage on legal services,
business case preparation, and financial analysis.

Shared Services, SAP whitepaper, prepared by SAP’s Business Solution Architects Group.
2. Examine the costs and benefits of joining the shared service model. Your answer should consider
the likely consequences of joining for employee relations and management control in the
organisation.

2.1 Introduction

While considering shared services, it is important to note that, the key is to maintain
everybodys attention on costs, not on its allocations.

When allocating costs from a shared service, the important points to focus on are:

1. Customers should be supported with clarity and check on the cost drivers
2. Supply adaptable usages of the resources, maintaining a constant allocation model
3. Service provider should be left to choose for the resource allocation and everyday control

The costs in shared services can be broken down to 2 components:

1. Infrastructure
2. People

2.2 Infrastructure costs

Infrastructure costs are to be put apart from the cost of operations and people costs.
“Examples of infrastructure include data transfer, rack space charges, outsourced server
monitoring, etc.”

Each item has a comprehensive cost, which is to be broken down among the customers
according to an allocation model that best represents the cost driver.

Example: Allocation of Infrastructure Costs

Data transfer into the data center for July cost $100. The allocation model for this infrastructure
item is bytes transferred by each customer company. XYZ Industries generated 75% of the
traffic during July, while ABC Incorporated generated the remaining 25%. As such, the data
transfer bill for XYZ is $75 and ABC is $25.

Racks for housing servers in the data center are depreciated at a rate of $50 per month. Costs are
distributed based on the number of servers used by each company. XYZ has 10 servers in place,
while ABC has 15. As such, XYZ's rack charges is $20 for July while ABC pays $30.

Server monitoring is compulsory for data center servers and is charged at $200/server/month.
This is billed directly to each company based on their servers in place so XYZ pays $2000 and
ABC pays $3000.

In the end, we have this equation to give the operating company cost for each infrastructure item:

ItemCostToCustomer = TotalCostOfItem x (CustomerUsage/TotalUsage)

2.3 People costs

People in a shared service spend their time on 3 things:

1. Project work
2. Ad-hoc tasks, maintenance and incident management
3. Managing other people

Each person working in a shared service has a specific cost. This will typically include:

• Salary & benefits

• Building and space costs
• Equipment costs

Time spent on project work and ad-hoc tasks can be directly allocated to customers, but
time spent on people management is harder to quantify. To solve this problem, we calculate the
cost of time spent on people management and allocate it among all reports under the manager.

Example: Allocation of people costs

 Kate is the manager of the shared service and spends 100% of her time managing people.
She does no direct project work and does not complete any ad-hoc tasks. Her cost, including
salary, building and equipment costs, is $100.

Kate has 5 direct reports, each of whom have 4 reports, giving a total of 25 staff in her
team. Kate's cost is divided evenly among all 25 reports, adding $4 to the cost of each person.

Kate has no time to allocate among customer companies (she's done no "real work"
afterall). But, her cost is effectively distributed by the work completed for customers since it is
allocated to staff who do "real work".

Keygan reports to Kate. His cost, including salary, building and equipment was $80.
With the management allocation from Kate, his cost is now $84.

Keygan spends 50% of his time on people management, 25% on projects and 25%
resolving ad-hoc issues. Per the model, 50% of Keygan's total cost of $84 is evenly distributed
among his 4 reports ($42/4 = $10.50 each). The 25% project work ($21) and 25% ad-hoc work
completed by Bill are billed to the customers directly.

Steve reports to Keygan and spends all his time on ad-hoc tasks. His cost, including
salary, building and equipment was $60. With the management allocation from Kate and
Keygan, his cost is now $60 + $4 + $10.50 = $74.50.

Of the ad-hoc tasks performed by Steve, 50% were done for XYZ Industries and 50%
were done for ABC Incorporated. As such, Steve 's cost to XYZ Industries is $37.25 and to ABC
Incorporated is $37.25.

In summary, the allocation of people costs follows these principles:

• All people costs are allocated and paid on an individual person basis. So, a
company that uses 25% of Ian's time will pay 25% of Ian's cost. This is not the same as using
25% of total time spent by the shared service team and paying 25% of their total cost. For
example, if we use resolved calls as the metric to determine ad-hoc time spent and include
 both L1 (average 300 calls) and L2 (average 50 calls) engineers in the cost calculation there
is no potential reward for moving calls from L2 resolution to L1 resolution.
• Time spent on people management (an rough estimate for each manager) is added
to the cost of the people being managed. So, you are only charged for actual work being done
but we recognise that part of the cost of using those resources is the management team in
place.
• Time spent on project work is directly allocated and billed to the customer
requesting the project. It's important to appropriately separate these tasks from ad-hoc time.
This ensures that we can see the real cost of project activities and keeps ad-hoc tasks
reasonably consistent in complexity (thus evenly cost distributed).
• Time spent on ad-hoc tasks is assumed to be the remainder after calculating time
spent on people management and time spent on projects.

http://www.e-gineer.com, Cost allocation model for shared services,

http://www.e-gineer.com/v2/blog/2007/08/cost-allocation-model-for-shared.htm

2.4 Evaluated Cost Benifits

The current services cost Caerphilly Council ,£4.8 million. The business plan, after the
implementation period would reduce the annual cost for Caerphilly to £3.8 million – a potential
annual saving of £1.0 million.

The cost reduction will be achieved in a number of ways:

• The sharing of administrative processes and specialist teams shows that a higher quality
of service is provided with less staff. It is projected that Caerphilly will gain around £300,000
annually from efficient use of staff;
• Shared service will provide specialist teams for recruitment and training that will help in
the procurement of third party recruitment and training services. It is sure that Caerphilly will
gain around £660,000 annually from the shared services.
 The shared service will manage the agency staff for the participating in local
authorities.The overall saving per local authority does not include this potential gain as it was
difficult to see how much the local authority would benefit.

2.5 Fiscal Perils

Given the substantial funds (circa £32m) to set up the Shared Services Centre, it requires
a 7 year period of investment to establish. Therefore, Caerphilly should be net gainers to the tune
of almost £1m per annum.

Subsequent to the preparation of the FBC there have been two significant developments
that impact the financial projections/risks, i.e:-

(i) WAG has agreed to contribute £10m to the implementation costs. However, it is
unclear ,whether it is grant or loan.

(ii) Cardiff City and County Council have withdrawn from the project

Assumptions of Caerphilly’s business case which could reduce the potential savings:-

(i) 3rd Party Procurement Assumptions

This is overstated by £150k per annum, still there are certain payments that will not be
reduced by a change in service provision.

(ii) Administration Efficiency

The current cost of service will reduce by a minimum of £250k per annum due to the
Corporate Services budget proposals.

(iii) Migration/Data

At least £50k per annum will be required for migration costs and termination of existing
arrangements for which the model makes no provision

(iv) Additional Costs of Borrowing

 It is identified that even with an assumption of a reduction of the costs by the provision of
WAG funding; Caerphilly will still be required to borrow extra to fund the proportion of set up
costs and to make a provision of at least £50k per annum.

When considering the financial assumptions, £1m savings identified reduces by at least
£850k. Therefore, Caerphilly may benefit to the tune of £150k savings eventually.

While considering the above mentioned facts it is clear that the savings and deductions
for Caerphilly are much more then the risks involved.

When allocating costs from a shared service, the key aims are:

1. Transparency and control over cost drivers.

2. Flexibility over the way resources, while keeping a single consistent allocation model.
3. Leave choice over resource allocation and daily control with the service provider..
3. Provide a reasoned decision as to whether Caerphilly should join this venture. Your answer
should make reference to the relative success of other shared service projects and existing
research in this field.

3.1 The Current Scenario

In the current scenario Caerphilly has a staff of 96 which looks after the HR, training and
payroll service spending £4.8 million annually, with a purpose to support workforce. It is the
responsibility of HR employees to offer good service. In smaller organizations majority of the
work is concerned with administration and the level of efficiency is less compared to the larger.

Shared services for HR, training and payroll services, have been considered as the
capacitate aid for the problem faced by Caerphilly, as budget squeezing on the central service
would affect the quality.

3.2 The proposed organization of the new service

The proposal is that the aims to be met by reorganising the service into the following related
parts:

A Single Transactional Centre which includes a support team for undertaking all
administrative tasks, a contact service front who offer advice on HR queries, an on-line service
which also gives advice on HR policies, review employment details and carry out certain
transactions.

Specialist Service Teams of 30% professionals from the existing, for respective participating
authorities, would work on Employee Relations Support, Job Evaluation, Designing Pay and
Reward Systems, Recruitment, Policy Design, Training Design and Delivery, Health and Safety,
Occupational Health and Management Information Services

Staff Retained by Caerphilly. It is anticipated that around 13senior and professional staff will
continue working within Caerphilly, which will rely on the centre to provide all administration,
case work and specialist support. The retained staff will advise on the management of change
and organisational development, identify resource, skill gaps and develop plans to manage these,
evaluate and improve service in response to the needs of citizens.

There is a prediction, that up to 83 FTE jobs will, therefore, be lost to the borough.

Redeployed Staff It is anticipated that the new shared service will operate with, on average,
around 30% less staff. Over the three year implementation period it is intended that those HR
and payroll staff who are not transferred will be redeployed to other roles. Financial provision
has been made, as an individual has skills and experience that cannot be transferred to another
role.

3.3 Appraisal of options

There were three options considered for the proposal, with the following result.

Option Three was the least preferable as it proved to be financially week. But there were
no strong financial case for choosing between Options One and Two. The relative strength of
Option Two lies in its earlier implementation date which would add to the momentum of the
project and reduces the time period. Thus Option Two was agreed upon.

3.4 Identified benefits of the proposed new arrangements

Anticipated Service Benefits

The most obvious reason to undertake such a step is to avail for an efficient and
productive HR Service. It will provide a scope and quality of expert support, a different approach
in the daily exercises and in the execution of the activity performed by various departments.
Paying close attention to identical jobs in an shared services organization achieves efficiency and
increase in the productivity.

Existing HR staff within Caerphilly do not have the opportunity to provide this strategic
support to place their workforce in the right location which would be then helped by shared
service proposals to use their potential to this end.
 There would be an opportunity fot the HRprofessionals to specialise. Consequently all
front-line services will get support to recruit, develop and make the best use of the employees
who work for them.

Estimated Cost Reductions

The current services cost Caerphilly £4.8 million. The business plan indicates that the
proposed new service would, then reduce the annual cost to £3.8 million.

The cost reduction will be achieved in a number of ways i.e, higher quality of service
with less staff, better management of specialized staff managing training and development of the
Caerphilly and third party as well, manage the procurement of contingency or agency staff for
the participating local authoritiesm.

The proposed model has been designed with local government for local government,
which will fit the needs for support, transactions, identified by local government.

3.5 Identified risks of the proposed model

Service Risks

If the managers wouldn’t adapt the new model in time, they would find it unsatisfactory,
which increasea risk of employment law litigation.

Financial Risks

Given the substantial funds to set up the Shared Services Centre, the financial model
requires a 7 year period of investment before any savings are achieved. Therefore, the model is
predicated on the fact that after the initial seven year period, Caerphilly should be net gainers to
the tune of almost £1m per annum, based on the assumptions set out. There are concerns about
the operation of the governance model, legal arrangement, Health & safety arrangement.
3.6 Conclusions

Overall, there are a number of notable points that are raised as a

result of the review of shared services arrangements. First, this review has
presented information that reveals a number of different opportunities which
can be considered to suit the respective needs. Also the fact that Caerphilly
is commited to the approach and believes in better productivity to the HR
services through this model.

Significantly, while there are advantages evident from the successful

application in shared services, there are also limitations and risks involved
for the same. The focus of shared services has to be by far proven profitable
for larger organizations. Additionally, the current information does not
specify the extent to which these arrangements are successful and the finer-
tuned activities and procedures that might be taken into account in ensuring
that broader success factors identified in research till now are applied which
is productive.

Thus we can draw an inference that, working closely with the planned structure, keeping
mind the risks, Caerphilly should opt for the shared service model as it would deliver better
offerings.
References

BOROUGHS, A. and SAUNDERS, J. (2007) Shared services that work for the business.
Strategic HR Review. Vol 6, No 4, May/June. pp28-31.

BusinessWeek Research Services, September 2007, New Era for HR Shared Services

Shared Services, SAP whitepaper, prepared by SAP’s Business Solution Architects Group.

http://en.wikipedia.org/wiki/Ibm - Wikipedia, the free encyclopedia.