Shared Services as an Asset in Supporting Innovation

and Growth

Archstone Consulting’s Calvin Yee and Jon Powell address not the cost-savings
opportunities but the value-added opportunities that companies can pursue to
provide true business partnership.

By: Calvin Yee and Jon Powell

(Issue Details: Volume 9, Issue 8, October 2007).

Shared services have long been seen as a supporting unit for the rest of the
business with limited impact outside of the bottom line. Now, however, companies
and directors of shared services face mounting pressure to make significant
contributions other than to the bottom line. With core transaction processing
moving to external service providers, what is the face of shared services as a
business partner today?

Increasingly, business-minded shared services leaders are addressing four

common questions:

o How does shared services support innovation and growth?

o How do shared services organizations (SSOs) innovate to impact the balance
of the enterprise?
o How do you re-define shared services from a transaction focus to a front-line
innovator?
o What are the success factors that shared services can adopt to increase
innovation?

Growth and innovation, two of the most critical issues facing companies today,
are historically, not the chief concerns of staff functions or of shared services.
However, shared services’ focus on process management expertise forms a critical
tool for cost-effective growth. This process management discipline, leveraged
through innovation initiatives, allows companies to overcome shortages of key
technical talent and lower product cost curves, and expand into international
markets. An effective SSO also attracts and retains top talent that companies
need to remain competitive.

Shared Services as a Foundation for Cost-Effective Growth

Wall Street continues to reward companies that demonstrate consistent,

profitable revenue growth. Not surprisingly, profitable revenue growth continues
to dominate the agenda for CEOs of the world’s largest companies. These CEOs
frequently report “sustained and steady growth,” more than any other challenge,
as their greatest concern. Wall Street applauds aggressive strategies from the
executive suite that explore new markets, launch new products, and develop new
lines of business. Constant innovation is demanded to maintain and increase
shareholder value.
But while innovation is considered the driver of top-line growth, what are
executives doing to ensure that their organizations are ready to launch and
support this growth? Are staff functions scalable? Can SSOs keep their costs down
amid revenue growth? Without the cost-effective scalability provided by shared
services, the rapid top-line growth powered by innovation can be dragged down
by non-discretionary investments in non-strategic back-office functions.

Leading Companies are Leveraging Offshore Delivery To Increase

Competitiveness

Do shared services contribute to profitability only by cutting costs? The Duke

University CIBER/Archstone Consulting study1 reveals that Forbes 2000
companies now view the offshoring of business processes, IT, engineering, and
R&D activities as a means to drive business growth, not just reduce costs. Of the
companies surveyed:

o seventy-three percent responded that offshoring is an important part of their

overall growth strategy
o product innovation and design, research and development and engineering
services were all cited as key offshoring initiatives
o seventy-one percent cited access to qualified personnel as a major concern
when considering offshoring (up from 54% in the last survey)
o China is the fastest growing location driven by manufacturing and product
innovation services (up to 12%, from 7% in the last survey).

Why do Companies Offshore Shared Services?

“Taking out cost” is still the most important reason cited (97% of
implementations). Surprisingly, 73% of implementations contained offshore
components as part of a growth strategy. “Growth strategy” and “access to
qualified personnel” are more commonly cited by companies with some existing
offshoring experience than by companies considering offshoring in the near future
(72% compared to 59% for “access to qualified personnel,” and 76% compared to
64% for “growth strategy”). However, companies with no offshoring experience
place greater emphasis on redesigning their business processes through an
offshoring strategy (71% compared to 42% for companies with prior offshoring
experience).

Applying Shared Services Process Management to Innovation

The results of the Archstone Consulting State of Innovation Survey 2006 indicate
that many companies reporting high expectations for innovation fail to match
these expectations with disciplined and effective process management and strong
management metrics and controls. While this may look alarming at first, we
believe that it is more likely indicative of a large-scale improvement opportunity
for those companies that recognize that their high expectations for innovation
investments must be matched with more disciplined management approaches.
These companies have a better chance of identifying their capability gaps, and
will close these gaps more rapidly than their competitors. Many attributes of
process management, such as metrics and controls, are the domain of SSOs –
they are the very reason SSOs exist. However, the rigor and tools around
measurement and metrics can be applied outside of the traditional transactional
scope to broader business process areas. Once considered the realm of business
partners, centers of excellence, or even corporate/governance bodies, these
business processes are ripe for examination and improvement.

Shared Services Enabling International Expansion

Globalization is often painful, yet the potential gains cause many companies to
pursue growth in lucrative overseas markets. Companies acquire operations
overseas, grow organically and struggle to compete with dominant domestic
competitors. The difficulties and challenges of growth combined with cultural and
regional complexities create a natural tension between CEOs and their country
managers. A Fortune 20 company we know is facing these issues today: with a
strong domestic heritage, its strategy for growth overseas was both organic and
by acquisition. A critical requirement for the company was a cohesive and
integrated business model organized around customers, rather than countries or
regions. To ensure this tight focus on customers, country managers were
transitioned into new roles as sales- and marketing leaders, without the country
geographic boundary. At the same time, staff function leaders in finance, HR, and
IT spearheaded a rapid move towards a limited shared services operation. Driven
by the need to meet regulatory requirements, and combined with the
implementation of best-inbreed outsourcing, the company transferred the
responsibility for administrative and regulatory activities to a central group. The
“former” country managers were then able to focus almost exclusively on their
markets and customer needs.

What are international leaders doing to support growth overseas? What role can
the shared services leader play in supporting growth. Are the “plug-and-play
integration” and “focus on core competencies” benefits of shared services and/or
outsourcing not applied outside of your domestic market? Implementing a shared
services concept or an outsourcing program to support profitable growth should
happen before the inefficiencies of the past are institutionalized.

Going Offshore to Overcome the Product Development Talent Shortage

The stories are numerous: companies are increasingly reaching out across the
global market to source cost-effective talent. The Duke University
CIBER/Archstone Consulting study of over 2,000 companies reveals “access to
qualified personnel” has gained significantly in importance since the first survey
(54% to 71%). One of the most important new findings of the survey, however, is
that “growth strategy” is now more often associated with offshoring product
development functions than with administrative functions (81% for R&D, product
design and engineering compared to 67% for finance/accounting, HR and other
back office services). Follow-up interviews suggest that offshoring actually
enables companies to increase their numbers of engineers and researchers while
keeping the cost of product development as a percentage of sales constant.
Shared services needs to drive not only the transactions and traditional overseas
processing, but also increase its scope beyond historic definitions (e.g. finance,
HR, IT) and the company’s domestic organization.

Keeping up with Competitor Moves

Right, wrong, or indifferent, shared services has historically been resistant to

change. The core business of a leading global consumer packaged goods
company shifted from a closed-innovation approach to a product development
approach, and then to an open innovation approach, which leveraged outsiders
and external experts to commercialize and license different technologies to apply
to their products. This move shifted the organization towards joint ventures
across commercial operations – and ultimately impacted the staff functions,
including the global business services organization. The company’s shared
services leaders opened their doors to innovation and partnership with an array of
outsourcers in areas ranging from finance to human resources and IT. Shared
services leadership thought: “If the business does it, why can’t we?” Evidence
suggests that the rest of the consumer packaged goods industry is striving to
catch-up with this revolutionary move. If your competition is innovating across its
business, then aren’t you taking a risk if you don’t?

Shared Services as Part of Redesigning the Cost Curve

A global manufacturer of automobiles and machinery, with a strong history of

lean manufacturing principles, renowned for effective and efficient operations,
was looking to re-invent the cost-curve per car. The company was leading most
industries in typical metrics of staff function efficiency (cost as a percent of
revenue, staff per employee, etc.) for finance, HR and other functions. But
instead of “resting on their laurels” as cost-effective today, leadership of the staff
functions focused on what they could do to be successful in five to seven years’
time. Their vision was to reduce costs per car in a systematic fashion, in line with
operations. By challenging the norms of a historically efficient but “siloed”
organization, they explored aggressive consolidation and revised shared services,
business process outsourcing and commercialization to achieve their needs.
Instead of settling for reducing costs when they were already performing well in
that area, they explored the opportunity to drive cost out of the company’s
extended supply chain of suppliers and vendors while also providing deeper
integration and transparency throughout the supply chain.

To drive the integration further and to add scale, the parent company also
explored the cost structures of its investments in other companies. Instead of
shrinking the pie further, they analyzed the scale and depth to which they could
apply their rigor and skills outside the confines of their own company. The
opportunity exists not just to reduce costs inside the company but for the entire
supply chain as well.

Is Additional Support for Growth and Innovation through Shared

Services Possible?

Competitors are deploying more integrated business models, extending deeper

into the supply chain and into customer relations. This shift is accompanied by
flexible and scalable SSOs that can adapt to a new scope of responsibilities, even
outside the company’s traditional boundaries. Shared services must be a leader in
transformation and re-engineering of end-to-end processes. But how can shared
services contribute to increasing growth and innovation? Historically, this has not
been the remit of staff functions or shared services. Two recent management
trends, however, provide an opportunity for shared services to add value
proactively: 1) companies are shifting their business models to stay abreast of
markets; and 2) business model innovation has the potential to create
competitive advantage.

1) Business Model Innovation

Business model innovation is becoming the new strategic differentiator. The

business model we choose can determine the success or failure of our strategies.
Our survey results indicated that innovation in the enterprise’s business model
garnered nearly as much attention as innovation in a company’s core processes
and functions. Companies that have grown their operating margins faster than
their competitors did so by placing greater emphasis on business model
innovation than underperformers. Effective process management is a linchpin to
innovation management. Shared services reinvented the internal service delivery
model of companies when first adopted. How can shared services now drive a
new business model moving forward?

2) Creating Competitive Advantage

Innovation doesn’t need a badge to get in. CEOs said their company’s employees
were the most significant source for innovative ideas. But ranking close behind
employees were business partners and customers – a key indicator that two out
of the three top sources for best ideas now lie outside the enterprise.
Collaboration can pay off. CEOs are more eager to partner and engage with other
organizations than ever before. Companies with higher shareholder growth
reported using external sources significantly more than the slower growers. As
one CEO said: “If you think you have all the answers internally, you are wrong.”

How can SSOs better leverage their current and potential partners and
outsourcing service providers to be successful? Are there sources besides
outsourcing providers that can contribute or otherwise inspire? Can shared
services succeed as the manager of an extended administrative supply chain with
multiple providers as opposed to one? Can shared services reach out to
academics and other thought leaders to re-define itself?

The Path Forward

We believe that shared services can innovate and drive fundamental business
model change with input from external parties. The increasing collaboration with
outsourcing service providers demonstrates that shared services can operate
outside the traditional confines of functional and organizational scope. shared
services remains a tool for cost-effective growth. The discipline of process
management resident in shared services can be leveraged by innovation
initiatives. The maturity of offshore service delivery by companies overcomes a
shortage of key technical talent in staff function but potentially adds higher value-
added core activities, such as research and development.

Shared services have redesigned the cost curve by expanding to the broader
supply chain of vendors and customers as their organizational scope. Critical
growth overseas, whether organic or by acquisition, requires a scalable and
manageable shared services or outsourcing solution. How will shared services
build on this potential?

About the Authors

Calvin Yee Jon Powell

Director Director
Archstone Consulting Archstone Consulting
cyee@archstoneconsulting.com jpowell@archstoneconsulting.com

Calvin is based in the New York office of Archstone Consulting, and Jon in the
Chicago office. Archstone is a global strategy and operations consulting firm
committed to helping clients realize their potential through innovation and
pragmatic strategies that are grounded in operational realities. For more
information on Archstone Consulting’s Offshoring Survey conducted with Duke
University or Archstone Consulting’s Survey on the State of Innovation, please
contact either Calvin or Jon via email.

Copyright © 2008 SSON. All Rights Reserved.

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